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I'm about to move to the US and I'm wondering: say I always keep an active balance and never overdraw/accumulate debt, will I still pay interest on my monthly expenses paid via credit card?

For example say that I've got a balance of 3000$ and spend 2000$. With a debit card I would have 1000$ at the end of the month (excluding yearly card ownership fees). Suppose I also owned a credit card, and used that instead of the debit card to spend the 2000$. Would I be paying interest on the 2000$ even though my balance remained active for the whole month or would I only pay interest on however much my liabilities would exceed my balance?

If one were to pay interest on the whole amount spent, why would anyone with sufficient amounts of liquidity want a credit card rather than a debit card? And also, which debit card would be flexible enough to accomodate for large spending while fully relying on the holdings in the balance?

Thanks in advance

  • By the sounds of the answers, it looks like they might not have debit cards in the US ??? – Victor Jun 17 '12 at 12:18
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Credit card payments
I think that you mean "credit limit" of $3000, not balance. If you spend $2000 using a credit card, your balance would be $2000. Now let's say that you start the month with a zero balance on your credit card. You spend $2000 during the month. You have not exceeded your credit limit of $3000 dollars. These are your two scenarios:

  1. When that month's bill comes due from your credit card, you pay off the entire $2000. In that case, you would pay no interest charges.
  2. When the bill comes due, you pay some amount less than the entire $2000 owed e.g. $1500. In that case, you would be charged interest on the $500 "borrowed" when you received the bill from the credit card company the month after that. Similarly, if you paid only the minimum amount allowed on the $2000, let's say $50, you would pay interest on $1,950, which is why it is so expensive to float credit card debt.

Alternatives
You also asked if there were a way to charge fairly large monthly amounts, with minimal expense and with ease of use. By that, I take it you are saying that you would be spending $2000 per month every month, then paying it off every month when the bill arrived. In that case, you may want to consider a charge card rather than a credit card (or debt card).

American Express's traditional product, which remains available, is exactly that. Holders of an American Express charge card agree to pay the balance in full each month. Limits are generally higher than those of credit cards. I would recommend that approach, given your described needs. The yearly fee is higher for AmEx than Visa/ Mastercard and other credit cards, but there is never any interest payment, and it is designed for a different purpose than revolving (debt) credit cards.

  • Feral, I don't think you have understood the question fully. The questioner is comparing a credit card (which your assessment is totally correct for a credit card with an interest free period) to a debit card. A debit card is a card you use exactly like a credit card, but instead of drawing on the banks money it draws on your own money in your savings account. That is why the questioner says he has a balance of $3000 in savings and uses $2000 of it on the debit card. – Victor Jun 17 '12 at 12:14
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    @Victor - yes, we have debit cards in the US. RE-read Feral's reply. I think he got it perfectly. All I'd add is that if one were so disciplined to never leave a balance when the bill is due, they should seek a credit card with (a) no annual fee, and (b) some rewards, often up to 2% on all purchases. – JoeTaxpayer Jun 17 '12 at 14:45
  • @Victor In some countries, "credit cards" are what are called debit cards in the US. One difference is that in the US, debit cards are linked to a bank account on which you can transact other business, e.g. write checks to pay bills, etc. The "credit card" guarantees the accepting merchant that he will receive payment since it is the customer's own money that is being paid out, as does the US debit card. If the "credit card" is not "refilled" each month, there is less that can be used next month, but no interest is due. If the US credit card is not paid in full, interest is charged. – Dilip Sarwate Jun 17 '12 at 17:13
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For people with very bad credit scores, or a very thin credit file, they can get a secured card. They deposit with the credit card issuer funds equal to the amount they can spend each month. That protects the issuer against their inability to pay. These tend to have low maximums.

For the majority of credit cards used are a regular card. The issuer looks at their income, credit history, credit score and the other debts they have to determine the credit limit.

For example they determine the user can have a credit limit of $3000. That means that they can spend a maximum of 3000. When they hit 3000 they risk getting the transaction rejected at the store, or website, for going over the limit. Every month they are sent a bill, and given a maximum of 3 weeks to pay that bill.

If they pay the bill in full every month, they will never owe interest. There is a minimum amount they have to pay, 4% of the bill each month, or they risk damaging their credit score.

Any balance they don't pay causes interest charges to start. They will continue to accumulate as you buy more stuff, and as the days go by before the entire bill is paid. Keep in mind that the $3000 limit is a maximum you can owe at any time. You must pay it down to continue to use the card.

Benefits:

  • The use of the credit card doesn't cause daily reductions in your checking account. A Debit card instantly draws down the checking account.
  • You can spend money at a store before you have the money in the bank. You can make that purchase the day before pay day because the bill may still be weeks away. With a debit card you risk overdrawing your account multiple times for overspending.
  • Proper use increases your credit score, and allows the company to increase your credit limits.

Risks: - Both types of cards have risks. Both can destroy your finances if you go crazy. - Both have fees that can drive the cost up if you don't use it wisely.

Credit cards and debit cards are completely different in timing of collection of funds. If the credit card bill is paid each month there never is an interest charge.

Note: this answer doesn't cover psychology of spending with credit cards, what fees are acceptable, airline miles, cash back cards...

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