# How to understand the calculation of interest for credit cards?

From Wikipedia

The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account.

I think I understand the above, but wonder how to understand the below, especially the sentence in bold?

Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).

In the sentence in bold, why will the user "still receive interest charges after paying the next statement full"?

Thanks and regards!

## 1 Answer

Suppose you have been paying interest on previous charges in the past. Your monthly statement is issued on April 12, and (since you just received your income tax refund), you pay it off in full on April 30. You don't charge anything to the card at all after April 12. Thus, on April 30, your credit card balance shows as zero since you just paid it off. But your April 12 statement billed you for interest only till April 12. So, on May 12, your next monthly bill will be for the interest for your nonzero balance from April 13 through April 30. Assuming that you still are not making any new charges on your card and pay off the May 12 bill in timely fashion, you will finally have a zero bill on June 12.

What if you charge new items to your credit card after April 12? Well, your balance stopped revolving on April 30, and that's when interest is no longer charged on the new charges. But you do owe interest for a charge on April 13 (say) until April 30 when your balance is no longer revolving, and this will be added to your bill on May 12. Purchases made after April 30 will not be charged interest unless you fall off the wagon again and don't pay your May 12 bill in full by the due date of the bill (some time in early June).

• Thanks! So the nonzero balance in May 12 bill due to interest between April 13 and April 30 has zero interest rate, as long as it is paid within its own grace period which is from May 12 to May 31?
– Tim
Apr 21, 2012 at 3:12
• @Tim I believe so but am not absolutely sure. Don't go by what Wikipedia says; it is the credit-card agreement that governs what happens. I have paid credit card interest only once in my life when my payment (in full) arrived late back in the good old days when payments were mailed through the US Post Office, and of course, credit card agreements have also changed since then. I have not read the fine print very carefully since I have a rooted aversion to paying interest. As long as it says there is a grace period for paying the bill in full and avoiding all interest charges, I am OK with it. Apr 21, 2012 at 11:21