Credit card interest

[red259]

I was reading a blogger article today where he wrote about not realizing how interest works with credit cards and it was an interesting topic, which I thought some people newer to credit may not realize. Many of us PIF our cards so this issue does not come up. However, if you ever think of carrying a balance and don't have 0% apr there are some things to realize. Lets say you have a 1k bill and you pay $900 on the due date. You will not be charged interest on just the $100. Instead you will be charged interest on the full 1k. The theory being that the reason you don't pay interest is the grace period. However, if you don't PIF they yank that grace period and charge you interest for the cycle. In addition, you will be hit with interest on all new charges as well. You will also be paying interest on your interest. Then there is trailing interest which is finance charges you get hit with from your last statement due date till your next statement close date. The problem is the credit card companies don't often calculate that until the next statement close date, so you can think you paid everything off and still get hit with a fee. Maybe I got something wrong here and if so people can feel free to correct me, but I am sure there are some people out there that would be suprised to learn how much of a trap credit cards can be if you don't PIF. 

[Anonymous]

Very interesting...did not know that.

[Anonymous]

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@red259 wrote:

I was reading a blogger article today where he wrote about not realizing how interest works with credit cards and it was an interesting topic, which I thought some people newer to credit may not realize. Many of us PIF our cards so this issue does not come up. However, if you ever think of carrying a balance and don't have 0% apr there are some things to realize. Lets say you have a 1k bill and you pay $900 on the due date. You will not be charged interest on just the $100. Instead you will be charged interest on the full 1k. The theory being that the reason you don't pay interest is the grace period. However, if you don't PIF they yank that grace period and charge you interest for the cycle. In addition, you will be hit with interest on all new charges as well. You will also be paying interest on your interest. Then there is trailing interest which is finance charges you get hit with from your last statement due date till your next statement close date. The problem is the credit card companies don't often calculate that until the next statement close date, so you can think you paid everything off and still get hit with a fee. Maybe I got something wrong here and if so people can feel free to correct me, but I am sure there are some people out there that would be suprised to learn how much of a trap credit cards can be if you don't PIF. 

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That's not correct at all.  In your scenario, you will not pay interest on the entire $1K but only on the $100.  Where the loss of the grace period applies is that the interest that you pay on the $100 is what was charged on a daily basis during the month for that amount only.  You certainly will not pay interest on the entire $1K.  Not sure whether the blogger is very misinformed (not unusual) or you misread it but let's not scare people too much.  Below is  a perfect example of how it works in an article by ThePointsGuy.  Your point about trailing interest is a good one as most people aren't aware of that feature,

"For simplicity’s sake, let’s say you make a $1,000 purchase on the first day of your billing cycle on a card that has an APR of 20%. However, you then only pay $500 of it off when your statement closes. At a 20% APR, your daily rate is roughly 0.0548%. This is charged on the remaining $500 for every day of that billing period. Assuming it’s 30 days, you’re now responsible for paying approximately $8.22 in interest, and this interest will continue to accrue as long as you carry that balance"

https://thepointsguy.com/2016/08/debunking-credit-card-myths-not-paying-balance-in-full/

[Spotsy]

im sorry Irish80....the OP is more correct than your assertion of only paying on the $500 dollar balance.  Every issuer can have a different definition of terms so please check each agreement to see what their terms are.  But as an example, below is an excerpt from one of many of the Credit One Bank CC terms....but similar to many others:

this is found in the familiar box of terms found in every credit card agreement....the Grace Period or “Paying Interest”...if any:

Your due date is at least 24 days after the close of each billing cycle. We will not charge you any interest on Purchases if you pay your entire balance by the Payment Due Date each month.

Balance must be paid in full every month to get “zero” interest charges on the account.

if the entire balance is not paid in full every month, then the “Average Daily”balance calculations kick in and you can get interest charges from the posting date of certain transactions.  That average daily balance can be over a 30 day period or even longer (I have seen some do a 60 average daily balance period) depending on the agreement. READ THE CC AGREEMENTS TO KNOW THE TERMS!  They will vary among issuers.

Below is an excerpt from Credit One Bank again about how the calculate the finance charges...as you will see it does start from the posting date of the charge unless you pay THE ENTIRE BALANCE by the due date every month:

There is a Minimum Interest Charge if you are charged interest; the Minimum Interest Charge assessed from the date the Purchase, Cash Advance, fee or charge is posted to your Account until the date it is paid in full, and will be calculated by applying the monthly periodic rate to the “average daily balance” of your Account. To get the “average daily balance,” we take the beginning balance of your Account each day, add any new Purchases, Cash Advances, fees and charges, and subtract any payments or credits and unpaid Periodic Finance Charges. This gives us the daily balance. Then we add up all the daily balances for the billing cycle, and divide the total by the number of days in the billing cycle. This gives us the “average daily balance.” Periodic Finance Charges will be assessed on all “average daily balances” until paid in full. No additional Finance Charge will be assessed for current transactions, other than Cash Advances, if your Account is paid in full on or before the payment due date shown on your billing statement. All Cash Advances and Cash Advance fees accrue fnance charges starting on the date of posting, even if the new balance from your previous statement was paid in full or even if that new balance was zero.

[longtimelurker]

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@Spotsy wrote:

im sorry Irish80....the OP is more correct than your assertion of only paying on the $500 dollar balance.  Every issuer can have a different definition of terms so please check each agreement to see what their terms are.  But as an example, below is an excerpt from one of many of the Credit One Bank CC terms....but similar to many others:

this is found in the familiar box of terms found in every credit card agreement....the Grace Period or “Paying Interest”...if any:

Your due date is at least 24 days after the close of each billing cycle. We will not charge you any interest on Purchases if you pay your entire balance by the Payment Due Date each month.

Balance must be paid in full every month to get “zero” interest charges on the account.

if the entire balance is not paid in full every month, then the “Average Daily”balance calculations kick in and you can get interest charges from the posting date of certain transactions.  That average daily balance can be over a 30 day period or even longer (I have seen some do a 60 average daily balance period) depending on the agreement. READ THE CC AGREEMENTS TO KNOW THE TERMS!  They will vary among issuers.

Below is an excerpt from Credit One Bank again about how the calculate the finance charges...as you will see it does start from the posting date of the charge unless you pay THE ENTIRE BALANCE by the due date every month:

There is a Minimum Interest Charge if you are charged interest; the Minimum Interest Charge assessed from the date the Purchase, Cash Advance, fee or charge is posted to your Account until the date it is paid in full, and will be calculated by applying the monthly periodic rate to the “average daily balance” of your Account. To get the “average daily balance,” we take the beginning balance of your Account each day, add any new Purchases, Cash Advances, fees and charges, and subtract any payments or credits and unpaid Periodic Finance Charges. This gives us the daily balance. Then we add up all the daily balances for the billing cycle, and divide the total by the number of days in the billing cycle. This gives us the “average daily balance.” Periodic Finance Charges will be assessed on all “average daily balances” until paid in full. No additional Finance Charge will be assessed for current transactions, other than Cash Advances, if your Account is paid in full on or before the payment due date shown on your billing statement. All Cash Advances and Cash Advance fees accrue fnance charges starting on the date of posting, even if the new balance from your previous statement was paid in full or even if that new balance was zero.

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Yes, that has been my understanding as well, if you don't PIF, average daily balance (over a defined period) rules kick in, so if you can't PIF, it always make sense to pay what you can as early as possible to reduce the average.

The trailing interest is really just a special case of the above, you owe interest on any non-zero balance including that coming from interest.

[K-in-Boston]

Irish's correction was true.  The only part of OP's post that I see that was incorrect was the paying the interest on the full previous statement balance, which is what Irish corrected.

Let's say you have a $0 balance and charge $1000 with a due date of September 28th and a statement date of October 1st.  You pay $900 prior to September 28th, but leave a balance of $100.  You lose your grace period going forward until the balance has been been paid in full, so the $100 remaining balance from the previous statement will now begin to accrue interest at the daily rate.  So let's say over the course of the month that you accrue $8 in interest, your new statement balance on November 1st would be $108.  You schedule a payment for November 15th for the full $108 statement balance assuming you now have a $0 balance.  However, there was interest accruing on the $108 between November 1st and November 15th, so you get hit with a statement balance of $4 on December 1st.  You pay that by December 28th and you should be back to $0 now.

The thing people DO get into trouble with, that the blogger or OP may have confused is "no interest for 12 months" type promos that are very common with store cards.  You make a $1300 purchase on September 15th and pay it all off by September 15th of the next year, and you pay no interest.  You make that same $1300 purchase on September 15th, pay exactly $100 a month for 12 months and still have a $100 balance on September 15th of the next year, you will now be charged the retroactive interest since you made the purchase (At 29.99% that would be $390!!!) and have a new balance of $490 instead of $100, which is now collecting 29.99% interest.

Hope that clears up any confusion.

(Edit: I mixed up some 1s and 28s in the first example.)

2nd edit: Forgot to mention that I agree strongly with OP that it can be a trap if you continue to make new charges and fail to pay your balances off.  With most lenders you will lose the grace period on any new charges if the previous statement was not paid in full, so you would begin to pay interest from the date the charge posts to your account until you had completely paid a full statement balance.

[AverageJoesCredit]

My head hurts


Strong cases to try and pif though

[K-in-Boston]

Okay, let's say AverageJoesCredit was traveling east at 120 km/h with a statement balance of €3500...

[Anonymous]

All credit card issuers are different

But for the most part, if you have a statement balance of $1000 and you pay $900, you DO NOT get charged interest on the whole $1000. 

That is so wrong 

[Anonymous]

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@Spotsy wrote:

im sorry Irish80....the OP is more correct than your assertion of only paying on the $500 dollar balance.  Every issuer can have a different definition of terms so please check each agreement to see what their terms are.  But as an example, below is an excerpt from one of many of the Credit One Bank CC terms....but similar to many others:

this is found in the familiar box of terms found in every credit card agreement....the Grace Period or “Paying Interest”...if any:

Your due date is at least 24 days after the close of each billing cycle. We will not charge you any interest on Purchases if you pay your entire balance by the Payment Due Date each month.

Balance must be paid in full every month to get “zero” interest charges on the account.

if the entire balance is not paid in full every month, then the “Average Daily”balance calculations kick in and you can get interest charges from the posting date of certain transactions.  That average daily balance can be over a 30 day period or even longer (I have seen some do a 60 average daily balance period) depending on the agreement. READ THE CC AGREEMENTS TO KNOW THE TERMS!  They will vary among issuers.

Below is an excerpt from Credit One Bank again about how the calculate the finance charges...as you will see it does start from the posting date of the charge unless you pay THE ENTIRE BALANCE by the due date every month:

There is a Minimum Interest Charge if you are charged interest; the Minimum Interest Charge assessed from the date the Purchase, Cash Advance, fee or charge is posted to your Account until the date it is paid in full, and will be calculated by applying the monthly periodic rate to the “average daily balance” of your Account. To get the “average daily balance,” we take the beginning balance of your Account each day, add any new Purchases, Cash Advances, fees and charges, and subtract any payments or credits and unpaid Periodic Finance Charges. This gives us the daily balance. Then we add up all the daily balances for the billing cycle, and divide the total by the number of days in the billing cycle. This gives us the “average daily balance.” Periodic Finance Charges will be assessed on all “average daily balances” until paid in full. No additional Finance Charge will be assessed for current transactions, other than Cash Advances, if your Account is paid in full on or before the payment due date shown on your billing statement. All Cash Advances and Cash Advance fees accrue fnance charges starting on the date of posting, even if the new balance from your previous statement was paid in full or even if that new balance was zero.

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Credit one Bank is not a good bank to use as an example. They are not normal with how they do their interest charged, compared to the big brands. 

Most credit one cards dont even allow a grace period at all and charge interest from the second you make a purchase.