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If my credit card currently has a $0 balance, and I make a transaction and pay it back within 25 days, I won't pay any interest, even if I had a balance and was paying interest previously. Is that correct?

Example:

  • I have a $5000 balance that I'm currently paying interest on.

  • I pay back the full balance from my most recent statement, including interest.

  • My balance is now $0.

  • I charge $4000 on my card.

  • I pay back the $4000 within 25 days.

Will I incur an interest charge? If so, any good way to avoid it, short of waiting?

I realize credit card terms vary, so I'm looking for a general answer (assuming most cards use the same method to compute interest charges).

  • money.stackexchange.com/questions/6598 clarifies this. If your balance drops to $0 between the closing date and the due date, you won't pay interest. However, a drop to $0 outside that time period doesn't guarentee zero interest. – barrycarter Feb 28 '11 at 20:43
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You should check your credit card balance rules. Some cards use something that is called "average daily balance" which means they calculate the average of balances you held over one or two billing cycles and charge interest on that. So the fact that your balance is $0 doesn't mean you won't pay any interest, at least until you keep paying it in full for two cycles.

See: http://credit.about.com/od/usingcreditcards/a/twocyclebilling.htm

I would advise just calling the customer service and asking, they have to disclose this information to you.

  • Thanks. This was exactly the thing I was worried about, and exactly the answer I needed! – barrycarter Dec 13 '10 at 13:53
  • If you have a card that does two cycle billing, I recommend cancelling it and finding another card. That's what I did in the same situation. – Alex B Dec 13 '10 at 17:34
  • Thanks, @AlexB. It looks like two cycle billing is illegal now, but it does explain why I've been previously charged interest even after getting a 0 balance. And that page links to the different ways credit cards compute interest, which is VERY helpful! – barrycarter Dec 13 '10 at 19:23
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Many credit cards have a 21 day period before interest begins to accrue, but otherwise you are correct in general (see Stasm's answer for an exception). I have had my Visa for three years and have never paid interest, because I always pay it off within 21 days of my oldest unpaid-for purchase.

  • I believe until recently it may have been possible for interest to be charged in some similar scenarios, such as when you pay the old balance AFTER the new purchase. Some card companies would count your payment towards the new purchase instead if the old, so they could collect more interest on the old. This is now illegal in the US. – Matthew Read Dec 12 '10 at 18:01
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Interest accrues based on average daily balance in most cases, so you keep accruing interest until the balance is zero. In my experience, once you are accruing interest, you will continue to pay interest on new spending if you are accruing interest on any day of the billing cycle.

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Thanks to everyone who answered. It looks like the average daily balance is how many credit cards do it, but I'm confused as to how this interacts with the grace period. I'm quoting what my credit card company says, but am not sure I understand it:

INTEREST CHARGE: Method of Computing Amount Subject to Interest: We calculate the periodic rate or interest portion of the INTEREST CHARGE by multiplying the applicable Daily Periodic Rate ("DPR") by the Average Daily Balance ("ADB") (including new transactions) of the Purchase, Advance and Balance Transfer categories subject to interest, and then adding together the resulting interest from each category. We determine the ADB separately for the Purchases, Advances and Balance Transfer categories. To get the ADB in each category, we add together the daily balances in those categories for the billing cycle and divide the result by the number of days in the billing cycle. We determine the daily balances each day by taking the beginning balance of those Account categories (including any billed but unpaid interest, fees, credit insurance and other charges), adding any new interest, fees, and charges, and subtracting any payments or credits applied against your Account balances that day. We add a Purchase, Advance or Balance Transfer to the appropriate balances for those categories on the later of the transaction date or the first day of the statement period. Billed but unpaid interest on Purchases, Advances and Balance Transfers is added to the appropriate balances for those categories each month on the statement date. Billed but unpaid Advance Transaction Fees are added to the Advance balance of your Account on the date they are charged to your Account. Any billed but unpaid fees on Purchases, credit insurance charges, and other charges are added to the Purchase balance of the Account on the date they are charged to the Account. Billed but unpaid fees on Balance Transfers are added to the Balance Transfer balance of the Account on the date they are charged to the Account. In other words, billed and unpaid interest, fees, and charges will be included in the ADB of your Account that accrues interest and will reduce the amount of credit available to you. Credit insurance charges are not included in the ADB calculation for Purchases until the first day of the billing cycle following the date the credit insurance premium is charged to the Account. Prior statement balances subject to an interest-free period that have been paid on or before the payment due date in the current billing cycle are not included in the ADB calculation.

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