When you use credit cards, a widely-recommended blanket rule that applies is to avoid paying interest whenever possible. But how many of us check how much interest was charged every time we open a credit card bill? Also, what do we do if the interest charged is not zero?
“If you're paying your full balance before the payment due date each month, the interest charged should be zero,” said Mirin Raul, a Dubai-based advisor on credit and debt-related issues, who went on to explain how it helps to know when credit cards charge you interest.
“Most cards offer a grace period, which means that a new purchase is not subject to interest until after the payment due date. While an interest-free grace period is there, this applies only if you do not have a balance at the beginning of the billing period.”
If you're paying your full balance before the payment due date each month, the interest charged should be zero
Instance #1: When you pay your credit card dues late
Let's say you have a new card with no balance. You charge Dh100 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 Dh100 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’re late to send your payment, you'll pay a fee as well as interest on the balance. 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, and interest is calculated starting July 1 — the day you made the purchase.
How much more interest will I then be charged?
“Depending on the card issuer, the interest rate charged daily may compound daily, meaning you will pay interest upon your interest each day,” explained UAE-based consumer credit analyst Rajesh Markara. “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, Markara further added that you may pay ‘trailing interest’ the following month, thus adding to your burden. Residual interest, aka trailing interest, occurs when you carry a credit card balance from one month to the next.
“Interest builds up daily between the time your new statement is issued and the day your payment posts. Since it accrues after your billing period closes, you won’t see it on your current statement. So, even if you pay your current statement amount in full, you may still owe accrued interest.”
Instance #2: When you pay on time, but not the full balance
If you are charged Dh1,000 last month, but only paid Dh900, you are starting the new billing cycle with a Dh100 balance. You might think that the bank would start charging interest only on the Dh100 balance that starts at the new billing period. However, that’s not the case.
As interest is charged if a purchase is not paid in full within the grace period, you'll be charged interest on the full Dh1,000 for the duration of last month's billing cycle until the date the payment for the Dh900 was received by your issuer.
At that point, your balance dropped to Dh100, and interest will then be calculated on that new balance until this month's statement closes. In order to get your grace period back you'll need to pay off the Dh100 balance plus the interest shown on your current month's statement.
Instance #3: When a promotional zero per cent interest offer ends
“When making use of a promotional period of zero per cent interest on your purchases, you won't be charged any interest during the 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,” added Raul.
“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.”
So Raul advises that if you choose to take advantage of an offer like this, closely study the fine print to make sure you understand what you're getting into, and check each month's statement to check that you have not been charged any interest.
When making use of a promotional period of zero per cent interest on your purchases, you won't be charged any interest during the period, but you will be charged interest on any new purchases as soon as the promotional period ends
Instance #4: When you transfer a balance from another card
“Although transferring a balance from a high rate card to a lower rate card can save you money, 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,” added Markara. “That means that you’ll not have a grace period on that card.
“If you’ve transferred your balance to one that offer zero per cent interest for a limited amount of time, while it may not matter as long as you're in the promotional period and only have the transferred balance on the card, as soon as you make a purchase on the card, it's subject to interest from the moment you bought the item.”
Additionally, as with the cards that offer zero per cent interest rate on new purchases for an introductory period, if you pay late, you could immediately lose your promotional rate and be subject to interest going forward.
Bottom line?
If your card has a grace period, you can maintain it by paying off your monthly statement balance in full by the due date every month. Some even find it helpful to pay off their card multiple times throughout the month, as smaller payments can be easier to handle than one lump sum.
Either way, maintaining your grace period means you shouldn’t have to pay any interest on new purchases at all. Keep in mind that if you have multiple late payments your credit card issuer might charge you a higher interest, which would apply to all future purchases, not just the late payment.
To help make sure you can pay at least your statement balance off in full each month and maintain your grace period, experts recommend monitoring your credit card balance regularly, not just when you receive your statement.
Also, try to charge only purchases you know you will be able to comfortably pay off within your card’s grace period. “If you do get into a situation where your grace period has expired, work to re-establish it as soon as possible, to avoid related incurred charges from snowballing,” Raul noted.
