Credit Card Question

[herdjohnson]

I have a quick question about credit card payoffs and how interest is charged. The hypothetical scenario:

John buys a 500 dollar whatchamacallit on his credit card. The statement date comes, and he has a few weeks to pay off the 500 dollars until he is charged interest. He goes out and buys a 500 dollar whosamagig on the same credit card, raising the balance to 1000. Then, before the payment is due, he pays 500 dollars on the credit card.

In this scenario, will he pay interest on that original 500, or is it shown that he paid off that 500 and incurred 500 in new charges?

The reason I ask, is that I put everything (bills, personal spending, etc...) on my credit card and then pay it off when the statement comes. I recently bought a new TV, and I could go ahead and pay it off by emptying my personal spending allowance account where I've been saving for it, but if I could essentially float that loan interest free using the method above, I'd be happy to pay a couple hundred bucks a month on it rather than drain that account.

Thoughts?

[Bades]

Whatever money is left on your card that you didn't pay off for that month will incur interset charges.

So if in April you spent $1000 and paid off $700, then that $300 will incur interest. If your interst rate is 10%, you get charged $30 (10% of $300). Now you have to pay back $330 by the next payment date in addition to anything you spent in the month of May on your CC.

You will pay interest on that $500...bad idea.

[Bades]

[QUOTE=herdjohnson;326054]but if I could essentially float that loan interest free using the method aboveQUOTE]

Not sure I'm following you. Where are you getting 0% interest?

[herdjohnson]

Whatever money is left on your card that you didn't pay off for that month will incur interset charges.

So if in April you spent $1000 and paid off $700, then that $300 will incur interest. If your interst rate is 10%, you get charged $30 (10% of $300). Now you have to pay back $330 by the next payment date in addition to anything you spent in the month of May on your CC.

You will pay interest on that $500...bad idea.

That wasn't the scenario. As of the statement date, John owes 500. He then spends 500 more, but pays 500 before the payment is due. Does that 500 he paid go toward the old purchase, or the new purchase? Technically he paid the full amount on the bill, but before he did that he spent 500 more.

[herdjohnson]

[QUOTE=Bades;326058]

but if I could essentially float that loan interest free using the method aboveQUOTE]

Not sure I'm following you. Where are you getting 0% interest?

Here is the timeline:

Day 1: Credit Card Balance: 0
Day 2: Purchase: 500
Day 3: Statement comes, need to pay 500 in order to avoid interest
Day 4: Purchase #2: 500 (total balance is now 1000 - 500 on statement 1 and 500 on statement 2 that hasn't been billed)
Day 5: Payment: 500 (total balance is now 500 and I have paid the full statement balance)
Day 20: Payment due date - Do I pay any interest?

[breathemusic]

No, you wouldn't pay any interest. If you pay in whatever the statement balance is before the due date, it will automatically get applied to the statement purchases, not any newer purchases. However I fail to see how this would help you slowly pay off a TV interest free. If you had all of your monthly expenses for a billing cycle as well as a TV on your most recent bill, then unless you send in a payment that equals the total of ALL of those expenses within that billing cycle, you'll end up owing interest on the balance.

[J.Apple902]

Whatever money is left on your card that you didn't pay off for that month will incur interset charges.

So if in April you spent $1000 and paid off $700, then that $300 will incur interest. If your interst rate is 10%, you get charged $30 (10% of $300). Now you have to pay back $330 by the next payment date in addition to anything you spent in the month of May on your CC.

You will pay interest on that $500...bad idea.

No. This is wrong. You would pay interest equal to:

Remaining balance at the end of your cycle * ( APR% / 12 )

Why divided by 12? Because it's annual percent rate, not monthly. The maximum interest rate you can ever have is 48% (payday loans), so those are 4% per month.

[kv968]

Whatever money is left on your card that you didn't pay off for that month will incur interset charges.

So if in April you spent $1000 and paid off $700, then that $300 will incur interest. If your interst rate is 10%, you get charged $30 (10% of $300). Now you have to pay back $330 by the next payment date in addition to anything you spent in the month of May on your CC.

You will pay interest on that $500...bad idea.

Actually you wouldn't be charged $30 in interest per month if the APR is 10%. They would charge the $300 balance about 0.0002740 (0.10/365) per day. Which would come to, not counting the daily compounding, about $2.47 in interest for a 30 day billing cycle.

Regardless, you should just pay off the balance in full.

[herdjohnson]

No, you wouldn't pay any interest. If you pay in whatever the statement balance is before the due date, it will automatically get applied to the statement purchases, not any newer purchases. However I fail to see how this would help you slowly pay off a TV interest free. If you had all of your monthly expenses for a billing cycle as well as a TV on your most recent bill, then unless you send in a payment that equals the total of ALL of those expenses within that billing cycle, you'll end up owing interest on the balance.

Ah, I see what you're saying... Didn't think about the double expenses on Month 1. I guess it's not a huge deal, since I found out the CostCo AMEX comes with 6 months no interest, and I can pay it off over that period anyway.

Glad to know that's the way they compute it for future reference though - thanks.

[Bades]

Actually you wouldn't be charged $30 in interest per month if the APR is 10%. They would charge the $300 balance about 0.0002740 (0.10/365) per day. Which would come to, not counting the daily compounding, about $2.47 in interest for a 30 day billing cycle.

Right, thanks

[Eleanor]

No. This is wrong. You would pay interest equal to:

Remaining balance at the end of your cycle * ( APR% / 12 )

Why divided by 12? Because it's annual percent rate, not monthly. The maximum interest rate you can ever have is 48% (payday loans), so those are 4% per month.

Ohhh. Thank you for posting this. I incurred interest on my credit card for the first time last month and I could not figure out why it seemed so much lower than I thought it would be. don't worry, I'm still trying to pay it off as fast as I can haha, I was just curious.