So many of us have experienced what our reader Kendra wrote about. The bill comes in, and your eyeballs bulge out from surprise at the credit card interest charges. Maybe you were late paying, and so knew there would be some sort of charge. Maybe you had been working really hard, like Kendra, to keep your finances in check, but because credit card interest is confusing, you didn’t have a full understanding of how it works. Either way, seeing the unexpectedly hefty bill can evoke the full range of feelings from frustration, defeat, embarrassment, and stress. Our financial expert, Colin, is going to teach us how to avoid these situations (and the unpleasant feelings that follow them) by breaking everything about credit card interest down for us.
I’m really confused. Last month, my credit card statement said I owed about $2,600. By mistake, I only paid $2,250. I only realized the mistake when I checked my statement this month. I usually pay my credit card statements in full every month, so you can imagine my shock when I realized I’ve been charged interest. The even bigger shock was that I was charged interest on the whole $2,600 and not just the missed portion. Is that really how credit card interest works? I thought interest only gets applied to the unpaid balance.
Kendra, W.
Hi Kendra,
As someone who usually pays their credit card balance in full each month, it makes sense that this caught you off guard. Interest charges aren’t something you’re used to seeing, and credit card interest can be downright confusing. Unfortunately, what you experienced is exactly how most credit cards are designed to work.
How credit card purchase interest works
Credit card issuers charge interest in several ways. Credit cards can charge different types of interest. Cash advance interest applies when you take out cash from an ATM using your credit card. Balance transfer interest applies when you move a balance from one card to another. Penalty interest is often an even higher rate and applies to missed payments or if you go over your credit limit.
The most common type of interest, and the one you’re referring to, is purchase interest. As the name suggests, these interest charges apply to purchases made with your card.
While frustrating, purchase interest kicks in the moment you don’t pay your full statement balance by the due date. It doesn’t matter whether you’re short by a few hundred dollars or just a few cents. Don’t pay a balance in full, though; it’s as though the grace period didn’t exist.
This is why interest charges shock many careful cardholders. Since the full $2,600 wasn’t paid, interest was added to each purchase starting from its purchase date.
How credit card grace periods work
Most credit cards offer a grace period, which is what allows you to use the card interest-free. Here’s the thing: the grace period only exists if you meet one particular condition. That is, you pay the full statement balance by the due date every month. As long as you do that, interest doesn’t accrue on new purchases.
Grace periods apply to purchases, but not to cash advances or balance transfers. For those transactions, interest starts right away. That’s why cash advances are usually a bad idea, and balance transfers only make sense if you qualify for a 0% offer or a much lower interest rate.
Can you get the interest charges reversed?
Since this looks like a one-time mistake and you usually pay your credit card on time, your card issuer may be willing to remove the interest as a goodwill gesture. There’s no guarantee, but it’s worth calling them, explaining what happened, and asking if they can reverse the charge just this once.
Even if the interest charge can’t be reversed, you could ask them to lower the interest rate that was applied to the balance. A lower rate won’t eliminate interest completely, but it can reduce the amount you have to pay.
How to avoid this in the future
I have a feeling that, after what you’ve experienced, you won’t be in the same situation again. However, I will share a few tips on avoiding credit card interest for anyone reading.
Always pay your credit card balance in full
At the risk of stating the obvious, the best way to avoid credit card interest is to pay your balance in full by the due date every month. As this article explains, failing to do so can cause interest to be charged on all new purchases starting from their original transaction dates.
Set up automatic payments
Most credit card issuers let you set up automatic payments so the full balance is paid from your bank account each month. This acts as a safety net if you forget to make a payment or accidentally pay less than the full amount. Just make sure there’s enough money in your bank account, or the payment could fail. Be aware that should this happen, you would also run the risk of the added financial setback of a non-sufficient funds charge. You can also arrange to have the minimum credit card payment taken automatically, but that won’t pay off the full balance, and interest will still be charged.
Set a calendar reminder a few days before the due date
It can be hard to keep track of all your bills, especially when they have different due dates. Setting a calendar reminder a few days before your credit card payment is due can help you stay on track. Even if you use automatic payments, it’s still a good idea to check your bank account to make sure you have enough money to pay the card in full.
Remember to pay your “statement balance”
When reading your credit card statement, it can sometimes be hard to know what balance you need to pay to avoid interest charges. Always look for the “statement balance” on your bill. This is the amount that you must pay by the due date to avoid interest charges. Your current balance may include new charges that aren’t due yet, which can be confusing. Just remember that the statement balance is the one you need to worry about.
The bottom line
If you don’t pay your full statement balance, interest can apply to the entire balance, not just the amount you missed. This can seem unfair, especially if you were only short by a small amount. That being said, it’s a rule that surprises many people who usually manage their credit well.
The good news is that once you understand how grace periods work, avoiding interest charges is easy. By using one or more of the tips I shared above, you can keep using your credit card with confidence and avoid surprise interest charges in the future.
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