Dumb question about credit card interest

[brandino29]

I realized I don't know if I understand how credit card interest is determined and charged.  It occurred to me that we may get hit with an interest charge even if we pay our balance to $0.  Here's why I'm thinking that---for the last couple of weeks we had a balance of about $1,200 on a card, a couple days ago I paid it off to $0.  Our billing cycle though runs through the 12th of each month, though.  Yesterday, my wife put $15 on the same card. 

I know that interest is calculated based on the average daily balance.  So if we had an average balance of $1,200 for half of the month, then paid it to $0, then charged $15, then the billing cycle ends and we have a $15 balance, will we get hit with an interest charge based not only on the current balance of $15 but the average balance of the 30 days, which would be much much higher?

 

[ragnathor]

You only owe interest if you don't paythe balance in full by the due date on your billing statement. If you don't pay it in full then you pay interest on the remaining balance only.

Using a credit and paying your statement in full every month actually means you are getting a short term 0% loan every time you swipe the card.

[Grid]

Hmm...  Say that you are billed at the end of every month, and you are required to pay that balance by the 25th of the next month.  In January, you spend $1200, pay it off on January 15th, then put another $15 on it, and finally they bill you at the end of January.  You only need to pay them $15 by February 25th in order to not owe interest.  If you hadn't paid $1200 on January 15th, you would just need to pay the balance down to $0 from $1215 by February 25th to not owe any interest.

[brandino29]

Here's what my card agreement says:

"In general, interest charges begin to accrue from the day a transaction occurs.  However, we will not charge you interest on any new transactions posted to the purchase Segment of your Account if you paid the total balance across all Segments of your Account in full by the due date on your statement each month."

I guess my confusion lies in whether or not it's considered that I've paid in full if I have paid the balance to $0 but then charge additional purchases. 

[Goldielocks]

I am always amazed at how long interest lingers on a cc statement.   In general, it seems like it takes 45 days to clear to zero, because you pay credit on the prior month's "borrowings" and not the current month statements, so you need 2 cycles of paid in full to fully clear everything off.

[bigalsmith101]

Here's what my card agreement says:

"In general, interest charges begin to accrue from the day a transaction occurs.  However, we will not charge you interest on any new transactions posted to the purchase Segment of your Account if you paid the total balance across all Segments of your Account in full by the due date on your statement each month."

I guess my confusion lies in whether or not it's considered that I've paid in full if I have paid the balance to $0 but then charge additional purchases.

The short answer is, "NO, it is not considered that you have paid in full if you have paid the balance to $0, but then charge additional purchases."

The credit card billing cycles are rigid. So the remaining "total balance" ($15 your wife spent) must be paid in full by the due date on your statement each month.

You can imagine the confusion that would exist if the credit card company restarted your billing cycle every time you paid off your current balance. Tyranny would ensue.

I'm going to give this a shot at explaining it in very basic terms for you, as I too found myself contemplating this a few years back. (Grid gave you the correct answer, but it may have been confusing to you).

We'll start with the facts. Your billing cycle ends on the 12th of the month. Now imagine the following.

1) Imagine you charge $1,200 dollars on your credit card during the month leading up to January 12th.
2) You're billing cycle ends on Jan 12th and you have a $1,200 balance on your card. This is called your statement balance, and it represents the previous months purchases.
3) You're bill comes (or you look at it online) and it shows that you have a minimum payment due of $30.00 by the 7th of February.
4) You have to pay your bill and you now have 2 options. You can pay the minimum payment of $30, and therefore accrue the interest charged, starting from the date of the earliest transaction. OR pay the statement balance of $1200 in full on Feb. 7th and avoid all accrued interest for that billing cycle.

Obviously you will pay the bill in full so as to avoid any interest charges.


Now we'll use your situation as an example to better facilitate understanding.

1) You charged $1200 to your card. You don't want to pay interest on it, so you paid off the card early on the 8th of January. You expect your credit card bill to show a $0.00 balance owed when it arrives.
2) BUT then, dear wifey uses the card and charges $15.00 on the 10th of January two days before your billing cycle ends.
3) The bill comes and it shows that you have a balance on your card of $15.00.
4) You now have to pay your bill. You can pay the minimum payment due. Or you can pay the statement balance in full to avoid the interest charges.
5) You must pay the total amount of the statement balance in full on Feb 7th as to avoid your interest charges.

Now we'll give you a more complete scenario

When you check your credit card balance online. It shows you three things (most likely). It shows you #1 The statement balance. #2 The current Balance. #3 Minimum payment due.

You want to make sure that you pay your bill in full so that you don't accrue any interest. But you're not sure exactly what that means.

You check your online banking and you see that last month you charged $1200 to your credit card in the months leading up to Jan 12th. You know this because the credit card statement says, STATEMENT BALANCE: $1200.00

However, your Current Balance reads : $1215.00. You quickly realize that this is because your wife charged $15.00 on January 13th, the day after your billing cycle ended. The Current Balance reflects the previous months billing cycle, and all purchases up to the current date.

Now you're confused. You don't want to pay ANY interest at all, so what do you do? Do you pay off only the statement balance? Or do you pay the current balance in full?

To avoid any and all interest payments, the minimum necessary action is the following.

You must pay your statement balance in full on the due date, each and every month.

So, you pay $1200. And no interest charges are charged to your credit card.

Now, between the end of your cycle on Jan 12th and the end of your new current cycle of Feb. 12th, you charge another $1000. (Your wife already spend $15.00, remember?)

Your bill comes and it reads:
Statement Balance: $1015.00
Current Balance: $1015.00
Minimum Payment Due: $30.00 on March 7th.

This reflects the $15.00 your wife charged, and the $1000.00 you charged.
You must now pay the Statement Balance of $1015.00 in full on the statement due date to avoid interest charges.

Simply pay the statement balance every month, and you'll never accrue interest charges. It may feel odd to you, because you know that you have an outstanding balance on your card. But this is ok.

Does that help?

[marty998]

Yep, all good advice above.

Remember the $1200 doesn't count as a minimum repayment.

If you don't make a payment between your statement cut-off date and the payment due date you're in default, notwithstanding you made a $1200 payment earlier.

[brandino29]

Thanks for all the helpful explanations!

[frugalnacho]

Be careful for residual interest.  It's an insidious trick used by credit card companies.  It works like this:

You charge to your card during the billing statement, then you do not pay your bill in full (even if you leave a single penny as balance).  They then average out the amount of $/day, and calculate out an interest rate to charge you - This is fine, that's how interest and cc works, but they don't add it to the bill until the end of the next statement even though it counts as your balance.  So you then charge $10k the next billing cycle, and notice you still have a single penny from last month on there, so you decide to pay your balance in full and pay $10,000.01 and wipe your balance to zero, and you think you have zeroed your account.  But the cc company calculates it like this:

Previous balance: 0.01
Current charges: 10,000
payments: 10,000.01
interest charged for last month: $xx (this amount is not shown on your current balance until after the current month, so you have to pay this in advance (and they don't tell you what it is) to zero your account).
real balance: $xx

Then because you technically have $xx as your account balance because of residual interest (which they don't show you until after the fact) you do not have a zero balance, and they calculate another residual interest charge which they will add to your bill next month (and count it retroactively as your balance even though they don't show it).

I got trapped by this by american express for a couple months before I figured out wtf residual interest was. 

[dunhamjr]

in the USA... not sure about CAD or elsewhere.

Here is the 'easy' way that to make sure you never pay CC interest.

Let's say your Dec 2014 statement arrives... and it says your balance is $534.69.

As long as you make payments of AT LEAST $534.69 by the Jan 2015 statement period closing date, you will not owe any interest on that $534.69.  As long as you pay at least the balance listed on your most current statement you will owe no interest.

My wife has been paying all of her cards this way for about 5 years now (just before we got married and I got an in-depth look at her 'hair on fire' debt emergency). 

Personally I prefer to always keep my CC balances low, so I typically make multiple payments per month on my daily spend CC just to guarantee a low balance.  It's a mental thing.  I know it doesn't help me $$ wise, but it helps my head. :)

[brandino29]

in the USA... not sure about CAD or elsewhere.

Here is the 'easy' way that to make sure you never pay CC interest.

Let's say your Dec 2014 statement arrives... and it says your balance is $534.69.

As long as you make payments of AT LEAST $534.69 by the Jan 2015 statement period closing date, you will not owe any interest on that $534.69.  As long as you pay at least the balance listed on your most current statement you will owe no interest.

My wife has been paying all of her cards this way for about 5 years now (just before we got married and I got an in-depth look at her 'hair on fire' debt emergency). 

Personally I prefer to always keep my CC balances low, so I typically make multiple payments per month on my daily spend CC just to guarantee a low balance.  It's a mental thing.  I know it doesn't help me $$ wise, but it helps my head. :)

I'm the same way, I prefer just to pay it down multiple times a month but I think that's what has been leading to my confusion.  I'm thinking my new strategy is change my autopayment option from the minimum monthly payment (which I've set just as protection so I don't accidentally forget to pay a bill on time but as I said I typically pay it off at random other points during the month) to pay the statement balance. 

I've not done it that way in the past out of nervousness that I would unintentionally overdraw my checking account but at the end of the day it will probably be easier this way than logging in manually and making random payments. 

[eyePod]

in the USA... not sure about CAD or elsewhere.

Here is the 'easy' way that to make sure you never pay CC interest.

Let's say your Dec 2014 statement arrives... and it says your balance is $534.69.

As long as you make payments of AT LEAST $534.69 by the Jan 2015 statement period closing date, you will not owe any interest on that $534.69.  As long as you pay at least the balance listed on your most current statement you will owe no interest.

My wife has been paying all of her cards this way for about 5 years now (just before we got married and I got an in-depth look at her 'hair on fire' debt emergency). 

Personally I prefer to always keep my CC balances low, so I typically make multiple payments per month on my daily spend CC just to guarantee a low balance.  It's a mental thing.  I know it doesn't help me $$ wise, but it helps my head. :)

I don't think that you get all of the rewards then. I'm pretty sure it's only on items money that hasn't been paid off on your statement. I could be wrong.

I always just pay off the bill once I get a notice that it's there. We use YNAB so there's no freaking out. We've only spent money that we already have. We look at it as a transfer from a (positive) checking account to a (negative) cc account.

[frugalnacho]

in the USA... not sure about CAD or elsewhere.

Here is the 'easy' way that to make sure you never pay CC interest.

Let's say your Dec 2014 statement arrives... and it says your balance is $534.69.

As long as you make payments of AT LEAST $534.69 by the Jan 2015 statement period closing date, you will not owe any interest on that $534.69.  As long as you pay at least the balance listed on your most current statement you will owe no interest.

My wife has been paying all of her cards this way for about 5 years now (just before we got married and I got an in-depth look at her 'hair on fire' debt emergency). 

Personally I prefer to always keep my CC balances low, so I typically make multiple payments per month on my daily spend CC just to guarantee a low balance.  It's a mental thing.  I know it doesn't help me $$ wise, but it helps my head. :)

I don't think this is strictly true - see my post above you.  If you did not pay your balance the previous month then the residual interest they calculate will not be included in your 534.69 bill (even though it counts against your current balance - this is exactly why I say it's insidious).  If you pay 534.69 then instead of a zero balance they will add the residual interest from the previous month which will make you have a non zero balance, which means they will average out your balance over the month and calculate residual interest for the following month as well (and not include it in your statement balance).  Once you miss paying your balance in full one month you have to pay more than your statement balance the next month (by at least the amount of residual interest they are going to charge) to break the cycle or else you get caught in a perpetual trap of them adding "residual interest" after you pay your balance to zero.

[plainjane]

As long as you make payments of AT LEAST $534.69 by the Jan 2015 statement period closing date, you will not owe any interest on that $534.69.  As long as you pay at least the balance listed on your most current statement you will owe no interest.

I don't think that you get all of the rewards then. I'm pretty sure it's only on items money that hasn't been paid off on your statement. I could be wrong.

That would be a very weird rewards card.  I am on a cash back card with no annual fee.  I pay off my complete balance every month (a couple of days before the due date just in case the bank decides to be annoying) and I got just under the maximum amount of cash back in 2014. 

If they only gave you rewards on the things you were carrying over you'd always be in a huge deficit.  Credit card interest rates are very high, and rewards are always lower.  If you want to share the card you are thinking of, I'm sure people on the forum would be happy to review and let you know.

[dunhamjr]

I'm thinking my new strategy is change my autopayment option from the minimum monthly payment (which I've set just as protection so I don't accidentally forget to pay a bill on time but as I said I typically pay it off at random other points during the month) to pay the statement balance. 

this is what i do.
autopays at minimum payment levels to protect myself/credit score from doing something stupid and missing a payment.
and i always set other payments up... one every week or two, depends on the spending going on. (i pay all the utilities, sometimes shopping, and all the medical bills on my CC)

[dunhamjr]

I don't think that you get all of the rewards then. I'm pretty sure it's only on items money that hasn't been paid off on your statement. I could be wrong.

I always just pay off the bill once I get a notice that it's there. We use YNAB so there's no freaking out. We've only spent money that we already have. We look at it as a transfer from a (positive) checking account to a (negative) cc account.

i am pretty sure its working out for me so far with my citi doublecash card... and i know for SURE that i have been getting all applicable rewards from my BoA and Chase freedom cards.

[Goldielocks]

Be careful for residual interest.  It's an insidious trick used by credit card companies.  It works like this:

You charge to your card during the billing statement, then you do not pay your bill in full (even if you leave a single penny as balance).  They then average out the amount of $/day, and calculate out an interest rate to charge you - This is fine, that's how interest and cc works, but they don't add it to the bill until the end of the next statement even though it counts as your balance.  So you then charge $10k the next billing cycle, and notice you still have a single penny from last month on there, so you decide to pay your balance in full and pay $10,000.01 and wipe your balance to zero, and you think you have zeroed your account.  But the cc company calculates it like this:

Previous balance: 0.01
Current charges: 10,000
payments: 10,000.01
interest charged for last month: $xx (this amount is not shown on your current balance until after the current month, so you have to pay this in advance (and they don't tell you what it is) to zero your account).
real balance: $xx

Then because you technically have $xx as your account balance because of residual interest (which they don't show you until after the fact) you do not have a zero balance, and they calculate another residual interest charge which they will add to your bill next month (and count it retroactively as your balance even though they don't show it).

I got trapped by this by american express for a couple months before I figured out wtf residual interest was.

+1  Yup Yup!  this is what I was alluding to, but did not know it.   I pay these charges so infrequently that I never took the time to really find out why.