Author: Carrie Kirby / Source: Wise Bread
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Please visit our Advertiser Disclosure to view our partners, and for additional details.Credit card interest is the worst. For one thing, most cards have APRs of nearly 17% on average, according to CreditCards.com. That’s compared to less than 4% for a mortgage or 11% on a personal loan.
When you use credit cards, you should aim to avoid paying interest whenever possible. Every time you open a credit card bill, check the line at the top that shows how much interest you have been charged. If this amount is not zero, figure out why you got charged interest so that it doesn’t happen again.
If you’re paying your full balance before the payment due date each month, that number should be zero. Here are some times when credit cards charge you interest.
1. When you pay late
Most cards offer a grace period, which means that a new purchase is not subject to interest until after the payment due date. The law requires interest-free grace periods to be at least 21 days. But the grace period applies only if you do not have a balance at the beginning of the billing period.
Let’s say you have a new card with no balance. You charge $100 on your card on July 1, the billing cycle closes on July 28, and payment is due on August 18.
You have until August 18 to pay your $100 balance off in full without paying any interest. This means that in effect, you’re getting nearly two months of an interest-free loan.However, if you forget to send your payment and it’s late, you’ll pay a late fee as well as interest on the balance, including on the late fee. While you might think that if you pay your balance two days after the due date, you’ll be charged two days’ interest, you will actually be charged much more than that. By paying late, you’ve lost your grace period retroactively, and interest is calculated starting July 1 — the day you made the purchase.
How much will you be charged? Credit cards disclose how they calculate the interest they’ll charge in those thin-papered, lengthy disclosures they send you, but in general, for every day that you have a balance during that month, you’ll owe that day’s balance multiplied by your daily periodic rate. You get your daily periodic rate by dividing your APR by 365. So the daily rate for a 20% APR is 0.054%. Depending on the card issuer, this rate may compound daily, meaning you will pay interest upon your interest each day.
You’ll see charges for this balance on next month’s bill. You started the new billing period with a balance, so you won’t have a grace period in the new billing cycle, either. At the end of the new month, you’ll pay for the interest on last month’s balance, which runs into the new month’s balance as well, plus interest on any new charges you make all month, and of course, a late fee for not paying on time. In addition, you may pay “trailing interest” the following month. More on that in a moment.
2. When you pay on time, but not the full balance
As we mentioned before, the grace period that cards offer only applies when you start the billing cycle with no balance. If you charged $1,000 last month, but only paid $900, you are starting the new billing cycle with a $100 balance. You might think that the bank would start charging interest only on the $100 balance that starts at the new billing period. But that’s not so.
As we saw in the example above, interest is charged retroactively if a purchase is not paid in full within the grace period. So you’ll be charged interest on the full $1,000 for the duration of last…
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