grace period

7 Times You Definitely Will Be Charged Credit Card Interest

Carrie Kirby — Mon, 18 Jun 2018 08:30:26 +0000

Credit card interest is the worst. For one thing, most cards have APRs of nearly 17% on average, according to CreditCards.com. That's compared to less than 4% for a mortgage or 11% on a personal loan.

When you use credit cards, you should aim to avoid paying interest whenever possible. Every time you open a credit card bill, check the line at the top that shows how much interest you have been charged. If this amount is not zero, figure out why you got charged interest so that it doesn't happen again.

If you're paying your full balance before the payment due date each month, that number should be zero. Here are some times when credit cards charge you interest.

1. When you pay late

Most cards offer a grace period, which means that a new purchase is not subject to interest until after the payment due date. The law requires interest-free grace periods to be at least 21 days. But the grace period applies only if you do not have a balance at the beginning of the billing period.

Let's say you have a new card with no balance. You charge $100 on your card on July 1, the billing cycle closes on July 28, and payment is due on August 18. You have until August 18 to pay your $100 balance off in full without paying any interest. This means that in effect, you're getting nearly two months of an interest-free loan.

However, if you forget to send your payment and it's late, you'll pay a late fee as well as interest on the balance, including on the late fee. While you might think that if you pay your balance two days after the due date, you'll be charged two days' interest, you will actually be charged much more than that. By paying late, you've lost your grace period retroactively, and interest is calculated starting July 1 — the day you made the purchase.

How much will you be charged? Credit cards disclose how they calculate the interest they'll charge in those thin-papered, lengthy disclosures they send you, but in general, for every day that you have a balance during that month, you'll owe that day's balance multiplied by your daily periodic rate. You get your daily periodic rate by dividing your APR by 365. So the daily rate for a 20% APR is 0.054%. Depending on the card issuer, this rate may compound daily, meaning you will pay interest upon your interest each day.

You'll see charges for this balance on next month's bill. You started the new billing period with a balance, so you won't have a grace period in the new billing cycle, either. At the end of the new month, you'll pay for the interest on last month's balance, which runs into the new month's balance as well, plus interest on any new charges you make all month, and of course, a late fee for not paying on time. In addition, you may pay "trailing interest" the following month. More on that in a moment.

2. When you pay on time, but not the full balance

As we mentioned before, the grace period that cards offer only applies when you start the billing cycle with no balance. If you charged $1,000 last month, but only paid $900, you are starting the new billing cycle with a $100 balance. You might think that the bank would start charging interest only on the $100 balance that starts at the new billing period. But that's not so.

As we saw in the example above, interest is charged retroactively if a purchase is not paid in full within the grace period. So you'll be charged interest on the full $1,000 for the duration of last month's billing cycle until the date the payment for the $900 was received by your issuer. At that point, your balance dropped to $100, and interest will then be calculated on that new balance until this month's statement closes.

Want that grace period back? You'll need to pay off the $100 balance plus the interest shown on your current month's statement. But that's not all. You may also be charged interest in the days between when the statement is issued and when your payment is received. This is sometimes called "trailing interest" or "residual interest," and it's most pronounced if you pay your bill with a check, which takes a few days to reach the issuer and clear.

For example, imagine you started February with that $100 balance. You receive a statement dated February 5 and send your check for the $100 plus interest on February 10. The issuer applies payment to your account on the 15th. Next month, you receive another statement saying you currently have a balance of $3.23. That's the amount of the residual interest, which was charged to your account between February 5 and February 15. One way to avoid this is to use online payments, but even then you should call the bank and ask exactly how much you will owe if you make your online payment on February 5. Then pay that amount in full on February 5.

Unfortunately, even doing that is no guarantee. Some credit cards require you to have no revolving balance for two full billing cycles before you get your grace period back.

3. When a promotional 0% interest offer ends

There are a number of credit cards that offer a promotional period of 0% interest on your purchases. You won't be charged any interest during the promotional period. But you will be charged interest on any new purchases as soon as the promotional period ends — and those interest rates can be high. That's why it's important to pay off the whole balance before the promotional period ends, and only use the card if you can pay off the full balance every month.

Also note that you can be charged interest if you pay late or violate some other part of the card's terms and conditions. If you choose to take advantage of an offer like this, read every word of fine print to make sure you understand what you're getting into. Check each month's statement to check that you have not been charged any interest.

4. When you take out a cash advance

Your card agreement will lay this out: Your grace period usually does not apply to cash advances. Interest will start accruing the day you get the advance. Not only that, but cash advances often charge a higher interest rate than purchases and may come with a fee as well.

5. When you use a convenience check

Those paper checks that your credit card mails you are basically like low-tech cash advances, with the same disadvantages: Interest starts accruing the moment the check is deposited, probably at a higher rate than your regular rate, and there may be fees. When I get these, I immediately shred them.

6. When you charge a lottery ticket

I was surprised to find this warning in one of my credit card agreements: Purchases of "cash equivalents" such as lottery tickets, traveler's checks, money orders, and gambling chips are not subject to the grace period. You may be charged interest on such purchases starting the day you make them, even if you don't carry a balance.

7. When you transfer a balance from another card

Transferring a balance from a high rate card to a lower rate card can save you money, especially since many balance transfer cards offer 0% interest for a limited amount of time. But you should keep in mind that once you have transferred a balance to a card, you are carrying a balance until you pay it in full. That means that you will not have a grace period on that card.

That may not matter as long as you're in the 0% promotional period and only have the transferred balance on the card. But as soon as you make a purchase on the card, it's subject to interest from the moment you bought the item.

Not only that, but because of the way payments are allocated, it will take you longer to pay off the balance than if you'd put that purchase on a different card. According to the law, an issuer can apply the minimum payment amount to whichever balance it chooses (the 0% transferred balance or the higher-interest new purchase balance). The bank will no doubt choose to put that minimum payment toward the no-interest balance. Whatever you pay above the minimum must, by law, go to the higher-interest purchase balance. But if it's not enough to clear the purchase balance, you'll now accrue more interest charges on it next month. Bottom line: Don't put new purchases on a balance transfer card.

And, as with the cards that offer 0% APR on new purchases for an introductory period, if you pay late or violate some other terms of the card, you could immediately lose your promotional rate and be subject to interest going forward. (See also: Your Comprehensive Checklist for a Successful Balance Transfer)

Beware the penalty APR

If you have multiple late payments, or if you write bad checks that the company has to return to you, your credit card company might slap you with a higher APR, which would apply to all future purchases, not just the late payment. Some cards will review your account and return your APR to your previous rate if you make consecutive on-time payments immediately for a certain amount of time.

Do you really have to pay?

Just because you see an interest charge on your credit card statement doesn't mean you absolutely have to pay it. If you have a sterling — and long — history with this card company, they may be understanding if you slip up only occasionally. I have successfully had customer service agents waive both late fees and interest charges when I accidentally paid a few days late or even when I forgot a monthly payment altogether. On other occasions, customer service waived the fee but not the interest. It never hurts to ask.

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Most Common Mistakes When Doing a Balance Transfer to Eliminate Debt

Jason Steele — Fri, 24 Feb 2017 10:30:36 +0000

Many credit cards offer 0% APR promotional financing on balance transfers, allowing you to move debt from high-interest cards onto one that offers zero interest for an introductory promotional period. These promo periods are nothing to sneeze at. They can last as long 21 months.

So what's the catch? The truth is that balance transfer offers can be incredibly valuable, but only when you use them properly and avoid making some common mistakes.

1. Assuming You'll Get the Best Balance Transfer Deal

You might not always be approved for the balance transfer card you want. For example, the best 0% APR deals are only given to those with excellent credit. While you may have had excellent credit in the past, having a large balance for a long time might have caused your credit score to slip. (See also: One Ratio Is Key to a Good Credit Score)

Even if you are approved for the card, it may come with a credit line that's substantially lower than you need. If that's the case, you may want to consider applying for a second balance transfer card.

2. Trying to Transfer a Balance From the Wrong Card

Consumers sometimes don't realize that you can't transfer a balance between two cards issued by the same bank. So if you have an outstanding balance on your Chase Freedom Unlimited card, you can't open up a new Chase Slate card and expect to transfer your balance to it.

Keep this in mind before you apply for a balance transfer card. Every time you apply for a credit card your credit score takes a little hit. It can usually recover fairly quickly, but there's no need to ding it unnecessarily for a card that doesn't even serve your needs. (See also: How to Choose a Balance Transfer Card)

3. Overlooking Balance Transfer Fees

Almost all credit cards charge a fee when you make a transfer, except for a few notable cards that don't charge balance transfer fees. Typically the fee is 3% of the transfer amount, but it could be as high as 5%. If your balance is small enough that you can pay it off within a few months, you're probably better off not transferring it to a new card.

4. Delaying Your Balance Transfer

You'll usually have 60 or 90 days to transfer your balance to the new card. After that the deal expires. Transfer the balance as soon as you can to get the most use of the promotional 0% period and cut down on the number of days your balance is accruing interest on your old card. Transferring your balance early will also ensure you don't forget about the deal and miss it altogether.

5. Misunderstanding How New Purchases Are Treated

If you make a new purchase on a balance transfer card, it will be subject to the card's regular interest rate unless the card specifically offers 0% interest on purchases, too. That means you've got two balances on the card: the interest-free transferred balance and the new purchase balance.

By law, credit card issuers must apply any payments above the minimum to the balance with the highest interest rate first. But they can apply your minimum payment to whichever balance they choose, which of course will be the one with no interest charges. As a result, you'll still incur interest on your new purchases.

Bottom line: It's best not make new charges on the balance transfer card unless it offers interest-free financing on new purchases as well.

6. Paying Late

It's always important to pay your bills on time, but it's even more so with promotional balance transfer offers. Pay late and you may find your 0% offer revoked, subjecting you to the card's regular higher interest rate way before you're ready for it. Add to that late fees the card may impose, and you've got an expensive mistake.

7. Stopping Payments on Your Old Card Too Soon

What some cardholders don't realize is that your balance transfer may not be completed immediately. It can take up to two weeks to process the transfer. Even if you've initiated a balance transfer, you will still need to make payments on your old card until you've confirmed that it's been paid off. Don't worry about overpaying — credit cards are very good about refunding you any overage you might have submitted during the transition.

8. Using a Balance Transfer Offer to Rack Up More Debt

Those 0% APR balance transfer offers are your chance to get out of debt, but unfortunately, many people squander that chance and continue to rack up debt. They can't resist the temptation of having an empty balance on their old card, so they keep making charges on it that they can't pay off right away.

Instead, use balance transfer deals as part of a comprehensive debt repayment plan. You should view the end of these limited time offers as a deadline for paying off your entire balance, knowing that 100% of each payment you make during this time will go toward your principle.

This article is from Jason Steele of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Everything You Didn’t Understand About Credit Card Interest, Grace Periods, and Penalty APRs

Kris Majaski — Mon, 23 May 2016 10:30:06 +0000

One of the most important elements to consider when choosing a credit card is the interest rate or Annual Percentage Rate (APR). However, figuring out all the ins and outs of how credit cards charge interest can be confusing. In order to get the most out of your credit card, especially if you like to keep track of rewards programs and cash back opportunities, it’s important to look at how your actions can affect the amount of interest you pay. When selecting a credit card, it’s more than just choosing the lowest APR or best rewards. Being aware of the aspects of credit card interest can mean more money in your pocket and less in interest payments.

Deferred Financing vs. Waived Interest

At first glance, it might seem you can’t go wrong with a card with a promotional 0% APR. However, knowing the difference between deferred financing and waived interest could end up being worth hundreds of dollars.

Deferred interest is most likely the offer you come across directly from a store. For instance, you can currently take advantage of 0% deferred interest financing on Apple purchases for 6 months on purchases costing under $498. The interest accrues during the promo period, but you don’t pay the interest unless you haven’t paid off the balance by the end of the promotional period. Further, if any of your payments are late, you could also be billed all of the interest that accrued since you made the purchase. With deferred interest offers, you will be assessed all of the accrued interest if you don’t pay your balance in full by the end of the offer.

Waived interest, on the other hand, is commonly offered by standard credit cards. If your credit card offers 0% interest that is waived, you are typically able to take advantage of the promotional period without accruing interest. If for some reason, you don’t pay your balance in full when the promotional period ends, you just start to pay interest on your balance according to the card’s APR at the moment.

When interest is deferred, interest is still accruing. If you don’t pay your balance in full, even if you just have $10 left on your balance, you get charged for all the interest during the period. But if the interest is waived, no interest gets calculated until the promotional period is over. Then interest will start being added based on the balance you have left.

In either event, it’s best to pay your balance off completely within the promotional period , but if there’s any chance at all that you won’t be able to pay your balance down during the designated period, it’s best to make sure your interest is waived rather than deferred. Check your credit card conditions and especially take note of terms such as “financing” and “deferred interest” if you aren’t sure.

Grace Period

The credit card’s grace period is typically the amount of time between the end of a billing cycle and your payment due date. According to the Consumer Financial Protection Bureau (CFPB) credit card issuers must ensure that your statements are mailed or delivered at least 21 days before their due date. In order to take advantage of the grace period, you need to pay the entire balance in full before the due date.

The grace period though, is surprisingly tricky to understand. The important detail to remember is that interest is charged retroactively if a purchase is not paid within its grace period. For example, you charge $1,000 on June 1. The statement closes on June 15, leaving you a 21 day grace period to pay that off. You make a payment on June 30 for $900. A reasonable person would assume that the bank would start charging interest on the $100 balance, starting at the new billing period. That is not the case.

You will get hit with interest on the entire $1,000 for the duration of that billing cycle (from June 1 to June 15). That interest will be immediately posted to your account. Then, interest is continued to be calculated at $1,000 until the date the payment was posted to your account (probably around 5/2). At 5/2, your balance dropped to $100, and interest will then be calculated on the new balance, until the statement closes.

Now, by leaving a balance on your account, you no longer get the grace period for new purchases. Because you have $100 on your balance, if you make another $500 purchase, the interest will start accruing on that $500 immediately.

In order to reinstate your grace period, you’ll need to pay off your balance before the statement closes (not when it closes and bills you), because interest accrues during the time the statement closes and your bill is due. If the new billing cycle starts with a zero balance, then the grace period will be reinstated.

On more note on grace periods: Grace periods generally only apply to purchases, which is one of the many reasons that cash advances and credit card checks can be expensive. Because there is no grace period for cash advances, you start paying interest on the transaction date, even if you pay the balance of the advance in full before your next billing cycle. Plus, the APR for cash advances is usually higher than the purchase APR – often well over 20%.

Penalty APR

In addition to APRs, deferred financing, and grace periods, there is also a Penalty APR to consider when you use your credit card. Not all credit cards charge a Penalty APR, but if they do, it’s important to understand how it can affect your payments.

Penalty or default APRs vary and have changed according to the Card Act of 2009. For consumer credit cards, a penalty APR can result in an increase to your interest rate if you miss a payment, make a late payment, or exceed your credit limit. For the most part, it means a significantly higher interest rate (often double what you start with) on new purchases. However, if your payments become 60 days late, the penalty APR can apply to your existing balance as well. However, if you end up in this situation, you aren’t permanently stuck with the penalty APR. According to the Card Act, once your rate is increased the card issuer must reconsider the penalty APR in six months and in most instances your APR will return to the non-penalty APR after making the next six consecutive payments on time.

Keep an eye on your fees and don’t hesitate to call your credit card to ask for a fee to be waived or lowered if it was just a one time mistake and you’ve been a good customer.

This article is from Kris Majaski of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: