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From Wikipedia

if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received.

I wonder if it is wrong? If the cardholder pays $999 at the end of the grace period, isn't the interest calculated based on the unpaid amount $1, instead of the total $1000? Thanks!

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3 Answers

Not only does the interest get charged from Day 1 on new purchases as long as you have a revolving balance, but the credit card agreement often says something to the effect that any partial payment is applied first to the interest to date, and then transfer balances on which no interest is being charged and so the bank is losing money on it, then to other transfer balances and cash advances (and no refund of that 3% fee that was collected up front on the cash advance) and finally to the purchases starting from the most recent back to the oldest one. Even the FAQ on my card site says in simple language "We apply payments and credits at our discretion, including in a manner most favorable or convenient for us." (see mhoran_psprep's answer).

The moral is indeed what Dheer has already told you: do not carry a revolving balance on a credit card and if you have a revolving balance, pay it off as soon as possible, Do not wait for the end of the grace period; if possible, pay it off the day the statement is issued, or if you can make only a partial payment, make it as soon as possible. Make multiple partial payments each month if you have cash flow problems, or improve your cash flow by forgoing one or more of the many Grande Vente Mocharino Espresso Lattes you consume each day. Credit card debt is close to the worst kind of debt that you can have, and it is best to get out from under as soon as possible. Remember, there is effectively no grace period as long as you have a revolving balance on your credit card. You are paying interest for every one of those days.

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Thanks! (1) I wonder what is the reasoning behind the order of the several things being paid? (2) "then transfer balances on which no interest is being charged and so the bank is losing money on it", Why "so the bank is losing money on it"? –  Tim Apr 22 '12 at 23:36
    
@Tim 2) The credit-card company has paid the other credit-card company when the balance was transferred over. You are not going to pay off that amount for a year, and so that money is not earning any interest. So, when a partial payment comes in, they apply it to the transfer balance. If you are carrying a revolving balance, it is to the advantage of the credit-card company to make that revolution last as long as possible. So, apply the payment to the nonproductive amount; the rest will keep till next month and maybe the month after that and earn more interest for the credit-card company. –  Dilip Sarwate Apr 22 '12 at 23:47
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The answer is the next sentence from the Wikipedia article:

The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement.

Your previous question on credit card interest rates quotes the sentence after this.

You have to review what the agreement for your card says. Also keep in mind the bank wants to make money from you. The more interest and fees they collect, they better they like you. If enough card holders adjust their behavior, to minimize interest and fees; the bank will then adjust the credit card agreement to get money a different way.

Yes, you are right it would seem fair to only charge interest on the smaller amount, but that doesn't allow the credit card issuer to maximize profits.

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The statement in Wikipedia is generic.
Whether a particular Bank would charge as per above example or not would be in the card holder's agreement.

So if you do not have any dues, and on 10th April you charge $1000, and on 13th April you charge $500. Statement date is 18th April. Grace Period to pay is say 10th May.

If you do not pay in full by 10th May, and say you only pay $500, Bank would charge interest from 19th April to 10th May for $1500, post 10th may they would charge interest for $1000 balance. Further all fresh purchases would be charged interest from day 1.

Net Net Morale of the story is do not carry / revolve money on Credit Card. For all practial purposes use a credit card as a convenience card.

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Thanks! In your example, "If you do not pay in full by 10th May, and say you only pay $500, Bank would charge interest from 19th April to 10th May for $1500, post 10th may they would charge interest for $1000 balance." I wonder if there is interest for $1000 between April 10th and April 18th, given there is a charge $1000 on April 10th? –  Tim Apr 22 '12 at 23:38
    
@Time: Normally no. The way Bank treat it this was payment was due on 18th April [statement date]. There is a grace till 10 may to Pay. So if you don't pay in full, interest starts from 19th Aptil. Again you need to read the agreement with your Bank. –  Dheer Apr 23 '12 at 1:42
    
Thanks! I don't have a specific bank to talk about, and I just would like to understand the most general case. So normally, (1) are the days between purchase/charge and statement date not counted when calculating interest when I don't pay full? (2) When does the grace period start, the statement date or the purchase/charge date? –  Tim Apr 23 '12 at 2:05
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