Recently, I went to pay off one of my older, higher-interest rate student loans, and was excited to finally have it at $0. I paid the amount shown in the “balance” field on the FedLoan Serving website, so I thought the loan was history. Wrong! I went back the next week to see my beautiful $0 balance, and the site said I still owed $1.05. I know, not very much, but still annoying! If I would had left that $1.05 there and not paid attention, I could have seen interest or late fees and have it grow again. That would be frustrating!
The same can happen with your credit cards. You might think you are paying off the balance every month, and you might be, but not within the contractual time period, known as the “grace period”. The grace period is the time you have to pay your balance before interest accrues. If you only pay the minimum by the due date, and then pay the remaining balance off before your statement cycle closes, you will suddenly have a balance applicable to interest. This means you will be subject to an average daily balance interest rate computation. So if you owed $1,000, paid $100 on the due date, and then the remainder on Day 29 of 30, your average daily balance would be closer to $1,000 and you would pay interest on that amount.
What’s worse is that if you keep paying your card off by the due date, you will still have average daily interest calculated and accrued on each statement. Why? Not paying your balance by the due date one time puts you into perpetual interest calculation. To stop this from occurring, you need to pay your card off and not use it until the next statement cycle. This will reset your grace period.
Also, be wary of offers to transfer a balance at a low rate on a card you are using for daily purchases and intend to pay off each month to avoid any fees. If you do this, your payments will go towards the promotional balance and you could end up paying interest on all purchases until you pay it down to $0. I suggest shopping for a card with a great balance transfer rate, at a site such as Bankrate or join Credit Karma, which can recommend the best cards based on your credit profile. Keep your everyday spending card, which hopefully gives you rewards of some kind, separate from balance transfers that you are using to reduce interest and have a plan to pay off before the introductory period expires. Strategize your balance transfers with the intention of fully eliminating revolving debt and not just to move it around. With any kind of debt, you should always have a plan with an endgame designed with payoff as the goal.
On a related note, I found a great post on creditcardinsider.com in case you are interested in learning more about how credit card terms work.
Have you ever been frustrated with interest charges that you thought should be paid off and done? Briefly share your story in the comments section on the blog page. As always, thank you for reading!