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So I have never owned a credit card in my life, and am trying to get ideas as to how they work. Sorry if this is too simple a question...

Lets say I have a credit card, and in one month I charge $1000 to it. At the end of the month, if I want to pay off the balance, am I paying $1000, or is there interest involved? Does it differ depending on the card?

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13  
There are no too simple questions when dealing with banks and how they affect your money. –  MrChrister Oct 19 '10 at 19:14

4 Answers 4

up vote 21 down vote accepted

In general, it works like this. For ease of explanation, assume that the billing cycle is aligned on month boundaries, and have 10 days from the time you get the bill to when you have to pay. These numbers will vary by credit card, but the concept is the same.

  1. Between Jan. 1 and Jan 31, you charge $1000
  2. On Jan 31, the January billing cycle ends
  3. You charge an additional $500 on Feb 5, and nothing more for the rest of the month
  4. On Feb. 10, you receive a bill for January, for $1000, due on Feb. 20
  5. On Feb. 20, you pay your bill of $1000.
  6. On Feb. 28, the February billing cycle ends
  7. On March 10, you receive a bill for $500, due on March 20.

There would be no interest charged in this scenario. As long as you pay the total amount of each bill by the due date, there is no interest charge. Note that if you continuously charge on your card, it may never have a zero balance, even though you are paying your bill on time.

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+1 Yup. Often a billing cycle is several days less than a full month, but the bottom line is to pay the bill in full when it comes and you should be fine. –  MrChrister Oct 19 '10 at 19:16
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Though I cannot say for all credit cards, Visa and Master Card usually provide a due date that is 21 days (i.e. 3 weeks) after the end of the billing cycle. And one other important point that I think applies to all credit cards: if you do not pay the full amount stated on your bill, you will be charged interest on the full amount, even if you covered most of the bill. –  Krsna Oct 20 '10 at 4:55
    
Krsna: You're correct. The numbers I used were just to make the example easy to understand. I clarified that point. –  KeithB Oct 20 '10 at 14:58

That will depend on the terms of the credit card agreement, but I have never seen a credit card agreement where you would owe interest in the scenario you described. As long as you pay the balance in full by the due date each month you shouldn't be charged any interest.

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(Hey, congratulations on overtaking me in reputation points ;-) –  Chris W. Rea Oct 19 '10 at 20:35
    
@Chris W. Rea - Thanks Chris. I think your moment of altruism putting a bounty on that other question gave me just enough of an opening to slip by. That'll learn you for helping other people! =) –  JohnFx Oct 19 '10 at 21:27
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Heh - next you'll need to earn a couple of gold badges ;-) –  Chris W. Rea Oct 20 '10 at 1:26
    
That's no easy task on this site. It takes a lot more traffic to get most of them. Hopefully after it leaves Beta I'll have a better shot at them. –  JohnFx Oct 20 '10 at 13:42

For most cards, If the previous month you paid, by the due date, the total balance as of the billing date, then no interest is charged on purchases made that month if you pay the balance by the due date. (It must be the previous two months for some cards). See the answer by KeithB for an example of paying the total amount. The period for which you do not accrue interest is known as a grace period.

If you did not pay your balance in full by the end of the previous month, then interest starts accruing right away on new purchases. Cash advances and balance transfers normally start accruing interest right away regardless of whether your balance was paid in full (they don't have a merchant to charge a fee to, so they have to get paid from somewhere.)

The details vary from card to card, so you should read the terms of your card, and/or contact customer service to be certain.

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  • You pay a yearly fee for having the card (although you could have a free card).
  • Anybody that fails to pay the bill will pay a hefty interest rate.
  • The shopkeepers will pay between 1,5% and 4% (I think) to the credit card company.

You should be able to get a free card, as the companies make most (I guess) of their money with the high interest rates, and the commissions.

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Credit card system commissions of 1-4% are paid by the retailer. Larger chains can negotiate lower rates while small retailers lose a disproportionate part of their revenue in these fees. If you want to support a local shop, pay cash so they can keep more of it. –  SpecKK Oct 20 '10 at 6:17
    
SpecKK: Cash isn't necessarily cheaper than a credit card. See this answer for reasons why: money.stackexchange.com/questions/2688/… –  KeithB Oct 20 '10 at 15:03

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