I’d like to think I’m pretty well versed on credit cards, though one thing I’ve never paid much attention to is interest rates. I realize interest rates are of interest (no pun intended) to many people in the country, given how common it is for people to carry a balance on credit cards.
While I think rewards credit cards are great for a majority of people, if you’re someone who can’t control your spending with credit cards, you absolutely shouldn’t get them. Paying 15%+ interest rates will more than offset any rewards you might earn. I realize there are strategic ways to take advantage of credit cards with 0% interest rates for a limited amount of time, though even that comes with downsides (it increases your credit utilization, which could harm your credit score).
All that being said, yesterday Andrew made me aware of something related to credit card interest rates that I wasn’t previously aware of. And I’m kind of surprised by it.
Say you have a credit card with a $1,000 statement balance, you pay off $990 of it, and you have a 12% annual interest rate. After a month, how much do you owe in interest? I would have thought the answer was $0.10 (which is 1% of the $10 you didn’t pay). Apparently that’s not the case, and instead your interest charge would be $10. Yes, the amount you pay in interest could be 100% of the amount you didn’t pay in time after just one month.
What I wasn’t aware of is that if you don’t pay any portion of your credit card bill on time, you’re charged interest for the entire balance that statement period, and not just for the unpaid portion. I’m not sure there’s really any logic for that, but it seems to be the case consistently.
That’s another reason to be sure you always pay your full balance every month. However, I’m sure we’ve all at one point or another had a late payment. I know I have, either because I had something marked wrong in my calendar, I paid most of a balance but not the whole thing by mistake, etc. When that happens, often credit card companies will waive the late fee and interest charges if it’s your first “offense” just by calling and asking nicely.
Maybe everyone else in the world already knew this, though it came as a surprise to me.