What exactly does 1.08% monthly interest on your credit card mean?

Piece by: Random Like Arum
Lifestyle

Standard Chartered bank announced to Kenyans a monthly interest rate on credit cards at 1.08% per month. This is the lowest in the market and the news was received with excitement for credit card holders and perhaps jealousy by those who hold credit cards with other banks. However, take a walk down the street and ask most Kenyans how these cards work and what exactly the 1.08% rate means. You will soon find out that not many understand credit cards or the benefits of having one.

This article offers a good explanation and why it should be worth considering to own one.

Why credit cards?

A credit card is a secure and flexible way to pay and can be a good way to spread the cost of major purchases. Credit cards let you spend money on credit – it’s like having a loan for the amount you spend using the card. If you pay off the bill in full each month, you won’t pay interest on what you’ve borrowed. If you don’t pay off any outstanding balance in full then interest will be charged.

How credit cards work

When you swipe to make a purchase, the merchant's credit card terminal inquires from your credit card issuer whether the card is valid and if you have enough available credit. Your credit card issuer reverts with a message that approves or declines your transaction. If approved, you can take your goods and/or services.

For each purchase, your available credit is reduced by that same amount. If you have a sh.30,000/= credit limit and you make a sh.5,000/= purchase, you’ll have sh.25,000/= available credit remaining. You'll owe sh.5,000/= to the bank. If you borrow another sh.10,000/= before paying back the sh.5,000/= you borrowed, you would owe the bank a total of sh.15,000/= and have sh.15,000/= in available credit.

What makes a credit card different (from regular loans) is that your credit limit is available after you paying the balance on the card. In the earlier example, if you paid back the sh.15,000/= that you owed, you'd have sh.30,000/= of available credit again.

You can re-do the process of spending up to your credit limit and paying the balance as many times as you like. This, provided that you you abide by the terms of the credit card, which include include making your payments on time and not charging more than your credit limit.

Interest Rate

Your credit card comes with an interest rate. Simply put, this is the price you’ll pay for borrowing money. You have a certain amount of time to pay back the entire amount that you borrowed before you're charged interest. This period of time before the interest is charged is called the grace period. If you don’t pay off your full balance before the end of the grace period, a fee or finance charge is added to your balance. The finance charge is based on the interest rate and your outstanding balance.

Why use Standard Chartered credit cards?

Interest rates are generally based on market interest rates and the type of credit card you own. However, Standard Chartered credit cards are quickly becoming a favorite for Kenyans. because the Interest rate on the cards have decisively remained steady. They offer the lowest rate in the market at 1.08% per month.