I paid that balance off! Why do they keep charging me interest?

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!

Photo credit: Alamy.com

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!

Learning to Behave, Financially

Personal finance bloggers give a lot of advice on what to do to save money or how to set up a budget, but it is a well-known fact that personal finance success is mostly reliant on your behaviors and patterns.  We all know that we should be saving some money for retirement and that a “rainy day” is coming sooner or later, but how can we put mind over matter?

Start small.  You may be gung-ho on getting your financial life turned around, but it often isn’t realistic to implement your plan in one day, one week, or even one month.  Instead of planning to do it all from the start, incrementally work your way towards success.  For example, if you eat out for lunch every day, start bringing your lunch one or two days a week.  If you spend substantially less than when you eat out, such as bringing a $3.00 frozen meal instead of spending $10.00, transfer $7.00 to your savings, or allocate that amount to your debts.  If you equate your behavior to actual money in the bank, you are likely to keep it up as you see your progress. 

Track your progress.  How many times have you made a perfect budget only to get so busy that you don’t track what you spent money on?  Let’s face it; not all of us are accountants with a love to tracking every cent that comes in and out.  Automate by using Mint or Everydollar, which sync bank and card accounts using a phone app and a web login.  Couples can stay in sync on income and spending by merging finances.  If a couple can get on the same page with money, you likely can conquer most other marital spats that come up over the years. 

Personally, I love tracking changes in my net worth over time.  If you have software that lets you download your finances, you can do this in Excel or run a report.  I use Quicken, but I am a dinosaur and now have to pay for Quicken, and I will give a crash course in a post later this month!  An alternative is to list all your assets on the top of a page or spreadsheet and list all your debts below.  Add up both assets and liabilities, and then take the difference of the two.  This is your net worth. Hopefully your assets are more than your liabilities, but I too once had a negative net worth.  It takes time and focus, so don’t let this number stop you before you start.

Net worth Report from Quicken Desktop 2020

Set attainable goals.  Instead of only making one big, fat, hairy goal, break it down into baby steps.  We all want to have a net worth of one million dollars when we are just getting started, but it takes years of good behaviors.  If you set out to save a million dollars for retirement, work backwards to figure out how much you will need to contribute at a historical rate of return that matches your investment risk levels.  Most retirement fund websites have calculators that you can plug in the number of years you have to work and the amount you want to retire with.  If you are paying off debt, list them out and make a game plan.  When you pay one off, celebrate a little and look forward to the next win!

Reward thy self.  If you set savings or debt reduction goals, and you meet them, be sure to splurge a little on one night out or a new clothing item.  You should set a limit for yourself, say $50, for a monthly treat, or maybe as much as a few thousand when you meet a major goal such as saving up three months of expenses or paying off all your consumer debt.  Of course, don’t go into debt or reduce your emergency fund to have fun, make sure you earmark new cash for this purpose.  Just as you sacrifice to complete a degree or get your kids through school, changing money behaviors is just as much of an accomplishment.  Change your behaviors slowly and they will become habit, which will show in the long run.

What’s your worst money habit?  Leave me a comment on my blog page!