Eli5: cc % charges


Not exactly how to word this as my last post was reported for hate speech. When exactly do you get charged interest? Have had balance on due date but no interest.

In: Economics

If you don’t have a balance from the previous month, you are not charged interest on the purchases you make this month.

If you do have a balance due from the previous month, you are charged interest on that amount.

Depending on the card you have, purchases made this month may also accrue interest, but usually there is a ‘grace period’ during which the new purchases don’t accrue interest. You have to read the agreement to find out.

I didn’t see any hate speech in your previous post, so I approved it.

Credit card interest it usually incurred if you don’t make the payment to cover so the previous months charges in full by the due date.

For example, assume your statement cycle (the monthly billing cycle) is January 1st to January 31st, with a due date of February 15th.

If your charged $500 during January, and pay that full $500 back by February 15th, you won’t pay interest.

Now, let’s say you made $500 worth of charges in January, and another $200 between February 1st and February 15th, you still only have to pay the $500 from January to avoid paying interest. You would then want to pay any February charges by March 15th to avoid interest on those February charges.

Now, most credit cards have a minimum payment of around 2% or a certain dollar threshold if the percentage doesn’t meet it, say $25. That means on a $500 balance, your minimum payment would be $25 because $500×2% is only $10 which doesn’t meet the $25 minimum threshold. If you only pay the minimum, you pay interest.

To figure out how much interest you’ll owe, a simple, but not 100% accurate calculation is take your APR (annual percentage rate), divide it by 12, then multiply by your balance.

If your APR is 22.9% (not atypical for store credit cards like Home Depot, Costco, Amazon, etc,), and your balance is $500, the interest you would pay would be (22.9 / 12 = 1.91%) x $500 = $9.55 in interest.

If your minimum payment was $25, $9.55 goes to interest, the other $15.45 to principal, leaving your new balance at $484.55. Just making the minimum payments will take you forever to pay it off.

Lastly, if you do a cash advance against your credit card, not only do a lot of institutions charge you a fee to do so, but interest starts incurring immediately, so even if you pay the balance on full by the statement due date, you will still pay interest.

Source, I work for a major financial institution.