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Sorry for the poor question title. I couldn't think of a better way to word it.

Suppose I have a credit card that offers a promotional no interest for 12 months on purchases made in the first 60 days. Within that 60 day window I make a large purchase that I'd like to spread out over the course of a year. Then, after the 60 day window I make another purchase with that credit card. Assuming I continue to make at least the monthly minimum payment but less than the new charges, what kind of interest will I be charged?

Some possibilities that I can come up with:

  • I will be charged interest on the amount of new charges minus the amount I paid. This makes some sense to me.

  • I will be charged interest on the entire balance. Perhaps once I'm making interest payments I'm charged interest on the whole balance.

  • Even if I pay more than the new charges, I'm still charged interest on them (perhaps the payment is credited specifically toward the interest-free portion of my balance). This seems the least reasonable possibility.

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Credit cards are backed by loans which are typically broken into subaccounts to allow the issuing bank to treat different portions of your balance differently. Besides allowing for management of promotional balances, this is important for other basic functions where the bank needs to break down balances into different categories, such as grace periods for new purchases, etc. It also allows the bank to track different balances for cash advances (which usually carry higher interest rates and/or additional fees), balance transfers, and normal purchases.

So, essentially, behind the scenes, your credit card is split into buckets. That big purchase you made during the promo period goes into a bucket of "promo period balance" and the other purchase(s) you make go into a different bucket of "normal purchase balance." When your card cycles each month, the calculations for things like fees, interest, etc are essentially done separately for each bucket of balance. So, the bank will calculate interest for your regular purchases separately from your promo purchases. Typically, in a credit card statement, the balances will be broken out into these buckets in some fashion on your statement, usually in the totals section at the bottom after the transaction details.

The bullets at the end of your question raise an important point - when you make payments, which balance(s) do those payments apply towards?

When your card cycles, a minimum payment will be calculated. The minimum payment is made up of all the interest you owe at that point, plus a (painfully low) portion of your total balance. If the payment you make is equal to that minimum, the interest is satisfied, and the portion of the payment allocated to balance is applied to whichever bucket the bank wants. So, if your minimum results in $100 of interest and $10 in principal, that $10 can be applied arbitrarily by the bank - different banks have different rules, so if you want to know where it will apply, you should ask your bank to explain their rules.

If you make a payment larger than the minimum monthly payment, regulation requires that the bank apply the additional principal to the bucket with the highest interest. This helps consumers, because it will reduce the interest you owe the quickest.

There is an exception to that rule which may be relevant to your example, and depends on the type of promo. Many introductory "zero interest" promos are actually deferred interest promos, not true zero interest. A deferred interest promo means that if you exceed a certain timeframe for paying back that promo balance (say, a year) you get a sudden hit of the entire interest against that balance. If you have a deferred interest promo, the bank must apply excess to the promo balance first for the two cycles immediately before the promo ends. This is to protect people from taking a big hit of interest because their payments were being applied to normal purchases instead of the effectively zero balance promo purchases.

As a reference, the regulations around credit cards changed significantly in 2009 due to the Credit CARD act, which is available on the ftc website if you want some light reading material.

  • So are you saying that in the middle of the promotion, even if I pay more than the amount of the new charges they could still apply the payment to the deferred-interest portion of the balance and I'd owe interest until I pay the whole thing off? Is this typically what happens? – Daniel Nov 22 '19 at 18:58
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    Not sure I'm totally following your example. If you're in the middle of the promo period, and you're making regular payments, you will not owe interest on the promo balance. You may owe interest on new purchases, but if you're paying them off in full within the grace period, you will not owe any interest at all in that given month. – dwizum Nov 22 '19 at 20:23
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    The "danger" of the deferred interest promotion is that if you haven't paid it totally off by the end of the promo period, you will owe interest on that balance after the promo period expires. Some people make a big promo charge, and then regularly use their card for normal purchases. They then pay down enough to compensate for the regular purchases, but don't pay enough to slowly chip away at the promo balance, so they eventually find themselves beyond the end of the promo period, with an unpaid promo balance that is suddenly accumulating interest. – dwizum Nov 22 '19 at 20:25
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    Only the portion of the minimum payment that is meant to satisfy balance (versus interest) is discretionary, money paid beyond that has to be applied to the subaccount with the highest interest rate - and, there are a handful of exceptions written into the regulation. Further, because it's discretionary, banks have pretty different policies, so really the best way to answer that specific question is to ask your bank. – dwizum Nov 22 '19 at 20:38
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    Further, the "minimum payment is discretionary" rule only applies when there is a minimum payment, which means after the card cycles. If you plan on paying for your regular purchases in a way that makes your interest zero, your best bet is to pay for them soon after you make the purchase, ideally before the card cycles. Done this way, your statement will show zero balance for regular purchases, and the minimum will apply to the promo balance, and you will never owe interest (assuming you pay the promo off on time). – dwizum Nov 22 '19 at 20:39

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