Credit Interest Explained
Savings accounts are among the most fundamental financial services a bank offers. We are often unaware of the credit interest feature in savings accounts or ignore it unknowingly. However, it can be beneficial as it helps improve financial security, this element can be a real boon. Imagine adding money into a savings account monthly without having to put in any extra effort while the funds within it accumulate more funds through credit interest.
Kotak811 offers customers a zero-balance bank account, eliminating the hassle of incurring penalties on non-maintenance of minimum balance in the account.
Another critical feature you might be interested in knowing about before opening a savings account is whether the interest will be directly credited into your account. Read this blog to learn more about credit interest and whether it is added to your savings account monthly or not.
What Is Credit Interest?
Credit interest refers to the amount you earn on your bank balance. When you deposit money into your account, the bank or the financial institution offering you the service gives you a certain amount in return as interest. This interest earned depends on the interest rate set by the bank.
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Monthly Returns On Savings Accounts
To break it down into simple words, when you invest or deposit a fixed amount in your savings account, you earn an interest amount on the funds. This interest depends both on the interest rate and the principal amount. Depending on whether the bank renders you simple or compound interest services, you earn your interest.
The interest credited by the bank monthly in your account is called a monthly return savings account.ActivMoney is highly beneficial when your savings account balance is significant. It is a great way to earn FD-like interest on your savings without the hassle of a lock-in period or your funds getting stuck for some time. It means you can access your money any time and still earn a good amount of interest on it. Since the interest rate offered by an FD is much higher than that of a savings account, you can get higher returns on the same amount!
How to Calculate the Interest Credited?
Calculating the interest credited is an intricate process that requires careful consideration of various factors. When determining the interest earned, credit interest plays a crucial role in this equation. This percentage represents the cost of borrowing money or the return on investment for depositing funds. Factors such as compounding frequency come into play. Annual, semi-annual, quarterly, or even daily compounding can significantly impact how much interest accrues over time.
When considering simple interest, the principal amount remains the same, meaning the credit interest is not capitalised. So, in which situation is the credit interest capitalised? When the interest you earn on your principal amount is added, you earn interest on the total amount. Below is a simple demonstration to help you understand this term better.
For Instance, you have earned an interest of 10 rupees on 1000 rupees principal amount in a month. It indicates that the interest you earned is at 1% per month. If this 10 rupee is credited to your account at the end of the first month, the principal amount becomes 1010 for the second month. It means the interest you earn the following month would be 10.1 rupees.
However, this is only possible when the interest is compounded over a specific time frame. It could be done monthly, quarterly, half-yearly, or even annually.
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Does Your Interest Vary, Based On Time Period?
When earning simple interest, the answer is no because simple interest is proportional to the time period. If you accumulate 10 rupees monthly as interest, you will earn 20 in 2 months. However, when considering compound interest, the term “credit interest capitalised” comes into the picture.Considering another example, let's calculate the amount you earn in a year when the interest is credited quarterly and monthly. To make this calculation, below is the compounded interest formula.
A= P(1 +r)t Here, A is the final amount you get back after a particular time. P is the principal amount. r is the interest rate offered by the bank/financial institution. t is the time period. Let us assume that the annual interest rate is 12% and the principal amount is 1000 rupees.Quarterly Interest:
Since we are now getting interest credited or compounded quarterly, the interest rate for a quarter is 3%, and it is gained four times since there are four quarters in a year. By substituting the formula, we get the final amount as 1,125.51, meaning that the interest earned over a quarter is 125.51 rupees.
Monthly Interest
When the interest is credited monthly, it becomes 12, and the interest rate becomes 1%. The amount obtained from this calculation is 1,126.83, and the interest amount is 126.83.
Clearly, the interest received when interest is credited monthly is higher and with a higher principal amount, the difference becomes even more prominent! However, there are other factors that you need to consider before deciding if a particular bank's savings account will be profitable in terms of returns or not.
Conclusion
Whether the interest is credited on a monthly, quarterly, half-yearly, or annual basis is totally dependent on your bank. However, as per the RBI regulations, the interest must be credited at least quarterly.
While getting monthly credit interest in your savings bank account may provide a boost to your finances, always remember that every individual's circumstances are unique. It is crucial to evaluate all relevant factors before making any decisions regarding which savings account suits you best - after all, your financial journey should fit your needs!
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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