Because I was in for a rude awakening a couple of months ago. I usually strive whenever possible to pay off the entire balance, but in early December I was short about 200 bucks due to some other mini-emergency. I figured, eh, no big deal, they’ll just charge me the interest on the unpaid balance (which, with my low 15% APR, wouldn’t hurt that much). Well, this being the holiday season I ended up springing for quite a bit of stuff, which went onto the next month’s bill.
Come the next bill, imagine my shock to find out that, no, they don’t simply charge you interest on the unpaid balance, but instead they somehow calculate your “average” balance over the course of the new bill, and hose you on that. Still wasn’t truly painful (7 bucks or so), but I was sorely pissed because it means that, if I don’t pay off the entire balance (even if I am 1 cent short), that there is effectively no grace period on new purchases, at all, when I thought grace periods were sacrosanct.
Yes I know, my fault for not reading the fine print on the back of the bill (deciphering, really, what is essentially a bunch of gobbledygook), but I will be from now on, and I will be paying off all balances in full. Bastards.
Each issuer is free to set up its own rules (unless prohibited by law), but the way about 90% of credit cards work is that you get no grace period on new purchases unless you paid off the previous month’s balance in full by the due date and you pay off the current month’s balance in full by the due date.
This leads to another gotcha that sometimes bites people: Say your credit card offers you a 0% balance transfer for one year. You say “Great! I’ll use that to pay off my 15% car loan that has a year left on it.” But you keep using your credit card to make those everyday purchases that you would normally just pay off at the end of the month. Surprise! No grace period for those everyday purchases unless you also pay off the balance transfer in full.
And before the credit card reform act went into effect, there would be no way to pay off those everyday purchases until after you paid off the balance transfer since most issuers applied payments to the lowest interest debt first. So the everyday purchases would rack up 21% interest charges until the balance transfer was paid off in full. The credit card reform act now requires that payments in excess of the minimum be applied toward the highest interest balances first, so it is now possible to get the everyday charges paid off before paying off the balance transfer.
If you find yourself in a position where you can pay off some of your purchases at the end of the month, but you need more time to pay off other purchases, use two different credit cards. Use one to charge all the stuff that you can pay off at the end of the month. You’ll get a grace period on this card. Use a different card for all the stuff you’ll be paying off over time. (And you should have some plan on how exactly you are going to pay for stuff before you start charging up your credit card.)
If you want to take advantage of some special promotional offer like a 0% balance transfer, then first pay off the entire balance on the card and then take the balance transfer. Then use a different card for your routine non-0% purchases until the special offer is paid off.
If everyone actually tried to read “the fine print”, no one would ever sign up for anything. They would become confused and tired or very frightened.
I try to always pay off my balance in full, but on occasion have been a day or two late. I found out that some credit card companies will charge interest on your purchases for the next two months even if you fully pay off the next month on time.
