To start, this is just a math question. I know how credit cards work and I have paid my cards off in full each month for 20-some years. A unique debt situation has occurred for me, with my dog needing knee replacement then chemotherapy, so I am looking at ways to soften the monthly blow. Please just help me with math.
My Chase credit card has a new feature, allowing me to choose some transactions ($100 and up) to “pay over time”, from 3 to 24 months, with a monthly fee.
For example, I had a charge for $495.42. I chose to pay it back in 3 months, with a $3.91/mo fee, at $169.05/mo (including the fee). A total of $11.73 in fees.
To pay off my full card balance that first month was (the full balance) - (169.05*2).
My credit card’s purchase APR is 23.49%.
My math question is if I would have simply left a balance of $338.10 for one month, then a balance of $169.05 the second month, and then paid it off, would I have paid more or less than $11.73 in interest?
I don’t know how credit card APR works on a daily basis.
The plan terms are changing, BTW. I got a notice that monthly fees will be UP TO 1.72% which is actually less than they are charging now. If they had this cap on my $495.42 charge the fees would top out at $8.52.
When using ADR, divide your interest rate by 365 (366 this year?) For you ADR = 0.2349 ÷ 365 = 0.000643561644. For the daily interest, take that day’s balance once all of the batches clear then multiple by the ADR and round to the nearest cent. For your example 495.42 * 0.000643561644 = 32¢
If you want to specifically talk about that charge and paying it off per month then you could look at the monthly rate which is approximately Interest = 365 ÷ 12 (technically it is the ADR * Days in billing cycle) which is 0.019575.
As an approximation
Month 1: 495.42 * 0.019575 = $9.70 in interest
Month 2: 338.10 * 0.019575 = $6.62 in interest
Month 1: 169.05 * 0.019575 = $3.31 in interest
For $19.63 in total interest.
I will point out that what you did was close to amortizing your credit card transaction over 3 months. Putting it in an amortization calculator at 23.49% I got $19.52 with a lot less work.
The reason yours was not a true amortization is that you did not make the same payment ($171.65) every month.
For ease, I’m simplifying 23.49% APR as 1.96% per month rather than daily.
If you paid in full, you would pay $495.42 when you receive your statement. However, you would still pay $169.05, so you are only carrying 2/3 of the bill for one month and 1/3 for a 2nd month. If you made no other purchases, I compute that would be 28.64% APR.
The problem is that there is not enough information. One would need to know what purchases you make during this period. Credit cards charge you no interest if you pay your account in full, but you pay interest on your average daily balance unless you pay your balance in full. So, for example, lets assume a billing cycle of 30 days, and your bill is $500. If you pay $499 on the 24th day, you will wind up paying 24 days of interest on $500, and 6 days of interest on $1.00. Also, if you make purchases during the billing cycle, you will have to pay interest from the date of purchase to the end of the billing cycle.
Incidentally, my Visa charges 13%. Paying 23.49% APR is usurious.
Ah, that makes a huge difference then. My monthly charges are usually around say $2000. So charging a lot AND carrying a balance month to month costs me a good bit more than the interest on just the un-paid portion.
With this scheme, they are allowing me to carry that small balance without any interest in relation to other charges, and just pay a monthly fee on that single charge.
Seems like a good deal to me - if I’m in a pinch for a few months, I can ease my payment burden without the huge interest rates. And good for Chase too because they’re getting $11 out of someone who typically would never pay them any interest.
Seems like they’re doing this to compete with the Buy Now Pay Later Apps that are “disrupting the marketplace” now.
In effect it allows you to isolate the special expense and pay it off over 3 or sometimes 6 months at an exorbitant de facto interest rate (exorbitant even by CC standards) in exchange for not triggering interest on the rest of your routine purchases.
A MUCH cheaper and more flexible way to do the exact same thing is to have 2 cards. Use one for all your normal stuff and pay it off monthly with 30-59 days free float on all your routine purchases. As yoy’ve said you normally do. Then have another card you never use, except for surprise big purchases you know you’ll need to spread over multiple months to chew & swallow. That way you can pay the surprise over time with interest but not garbage fees without affecting your normal card & normal cashflow.
Chase’s goal with this “pay over time” plan of course is for you to not to have and use another card from the competition.
I run a lot of money through Chase CCs every month and they drop those offers on a sizeable fraction of my purchases.
Unfortunately, they tend to get cancelled after a few years if you really never use them. I had a second card I kept around partly to boost my credit score, partly because it had a higher limit. I had put one monthly charge on it, but that ended for some reason, and after a few years of no transactions they closed it without consent or warning.
Back when the stuff hit the fan in 2008 a lot of CC companies suddenly looked at how much total unused credit they had out there and they killed a lot of folks’ standby cards. Which was an ugly surprise to many people who were still perfectly creditworthy.
My own technique is to have several, but use one as primary for “everything”. But make a purchase or two per year on each of the others. Stick standby card in your wallet, go to the grocery store or wherever, then out to dinner, then put it back in the drawer until next year. That avoids the dormant surprise cancellation.
Traveling as much as I did / do, having your primary card frauded out while you’re away from home is a right disaster. So carrying a second one that serves only as a backup is IMO smart.
All of which is getting a bit far afield from the OP’s FQ.