Credit Card Interest Question - Interest on Interest and Timing

• 

  Domingo on 14/07/2015 - 10:49

  +1

  Disclaimer - all based on my understanding

  Part 1. Up to 55 days interest free
  This is if you buy something on the first day of the billing cycle, with the statement due 55 days later. If you buy on the second day, it will be 54 days. If you buy the day before the statement is due, you'll have around 25 days (working on a 30 day month. this will vary a little).

  Part 2.
  Unsure sorry, this should be something the bank/credit provider can help with and might be listed in their PDS/T&Cs

• 

  Gotchas on 14/07/2015 - 11:11

  How about you just pay the full amount a day before its due so there's no chance you'll be paying any interest

• 

  zoombie on 14/07/2015 - 11:25

  +1

  If you are being charge interest on the initial $500 then it means there won't be an interest free period on the $1000 purchase. So you will get charge interest on the $1000 purchase calculating from July 3rd (interest is calculated on your daily closing balance). I know you are thinking that you have "reset" it by paying the full $500 on June 23rd and that you will get interest free period for the next month but it doesn't work like that with credit card. In order to get interest free purchase, you cannot have interest charge in the previous month. Once you get an interest charge, there are two ways to "reset" it. You either pay the closing balance for two months in a row, or get a payout figure and pay that off straight away.

  The $50 payment will reduce your closing balance but it makes no different in terms of whether it goes towards your purchase or interest charge. Both the interest charge and the purchase will be calculated at the same rate. The banks will count the interest charge as a "purchase" on their system so it makes no different.

  ps its possible that you will not get interest charge on the $1000 purchase, if the $500 payment was the second month that you have paid in full in a row.

  • 

    oodian on 14/07/2015 - 11:43

    +1

    Thanks - that's helpful.

    So if I owe $3000 on my card today and my statement period ends 27 July. Based on your reply, if I pay that $3000 today and then make another purchase before Jul 27, that purchase WILL NOT qualify for the interest fee period.

    However is it correct that, if I obtain a payout figure - this maybe say $3100 (greater than the $3000 owing) and pay that off before Jul 27, the purchase I make before Jul 27 WOULD qualify for the interest free period?

    If that's the case, how would I obtain a payout figure?

    • 

      Zoop on 14/07/2015 - 11:50

      +2

      It will be on your monthly statement.
      Minimum payment due (Ignore this)
      Statement Closing Balance (Pay this)

      Don't overthink things.

      • 

        oodian on 14/07/2015 - 11:56

        OK, I'll provide more specifics. I have a tax bill I have to pay before the close of my current statement period. Let's say I owe $3000 to the ATO and $3000 which is currently accruing interest on my credit card. I want to pay off the credit card amount then pay the ATO using my CC to make use of the interest free period.

        Any suggestions?

        Edit: I only have sufficient funds to pay one or the other and not both

      • 

        Richardc on 14/07/2015 - 12:08

        +1

        @oodian:but can u pay the ATO with credit card?

      • 

        zoombie on 14/07/2015 - 12:14

        @chenrenchun: You can pay the ATO with credit card but some financial institution don't allow it and some do allow it but it doesn't count towards the reward points.

      • 

        Baysew on 14/07/2015 - 12:15

        @chenrenchun: Yes, ATO adds on Visa & Mastercard .42% and Amex 1.45% surcharge.

      • 

        oodian on 14/07/2015 - 12:26

        @Baysew:

        Yes - this is correct. In my situation, I have done the math and it is cheaper to pay that fee than the interest I would pay on my CC.

      • 

        Lodapan on 15/07/2015 - 23:02

        @oodian:

        Ah I get it. Yeah you won't be able to make any interest-free payments on the credit card if you didn't pay the full balance on last months' statement.

        Given your situation, you're probably better off paying the credit card down if you have the money available to do so. Credit card interest is significantly higher than the ATO interest rate (https://www.ato.gov.au/Rates/General-interest-charge-(GIC)-rates/) so you'll save some money by paying your tax bill off by instalments. Call the ATO to arrange this and see how the maths works out.

    • 

      zoombie on 14/07/2015 - 12:13

      +1

      You can get a payout figure by calling up the bank. The payout figure consist of amount owing plus any background interest that is owing up to that day.
      I'm not sure when you have to pay the ATO back but what I would do is get a payout figure, pay it off. And then pay the ATO on July 28th so you can maximise the 55 day interest free period.

      "So if I owe $3000 on my card today and my statement period ends 27 July. Based on your reply, if I pay that $3000 today and then make another purchase before Jul 27, that purchase WILL NOT qualify for the interest fee period" - I'm going to make the assumption that you still have residual interest on your card (basically I'm assuming that the interest from the $500 was the first month and that you haven't paid two months closing balance in a row), if that's the case then yes you will not get the interest free period. Obviously, by paying The $3000 and then make another purchase, you will reduce how much interest you will pay as interest is calculated on your daily closing balance.

      "However is it correct that, if I obtain a payout figure - this maybe say $3100 (greater than the $3000 owing) and pay that off before Jul 27, the purchase I make before Jul 27 WOULD qualify for the interest free period?" - Yes, by getting the payout figure, you paying everything off including any residual interest owing.

      • 

        oodian on 14/07/2015 - 12:22

        Brilliant, thanks. You are a gentlemen and a squire.

      • 

        zoombie on 14/07/2015 - 12:40

        @oodian: No problem :) Just to clarify something, let say you get a payout figure of $3100, obviously the $100 is the interest owing, the interest will not come out straight away. It will be charge in next month statement cycle so don't be surprise when you get charge a small interest next month.

• 

  Baysew on 14/07/2015 - 12:26

  +1

  In these situations it's a good idea to have two credit cards.
  That way you can take advantage of getting maximum interest free periods.
  (My partner had each a card with an additional cardholder. The cycle dates were 1st and 15th)

  In the OP situation it might be better to have a low interest card (even if it doesn't have an interest fee period)
  if the card can't be be paid off in full each month.

• 

  try2bhelpful on 14/07/2015 - 13:29

  +1

  Not sure if this helps but this is a URL for NAB discussing credit cards and interest charges.

  http://learn.nab.com.au/avoiding-credit-card-interest-part-1…

  There are a couple of other links that give information as well. In particular there is a link on how the interest free days are worked out and what happens when you don't pay in full. It gets a bit frightening in you don't pay in full and keep making purchases. This is why I pay mine out in full every month. The other thing to keep in mind is that banks like NAB are likely to waive the credit card annual fee if you have a certain number of shares. I only found this out when I threatened to cancel my cards and they produced this rabbit out of a hat to keep me. (More fool them I pay mine off every month so I get the convenience,and points, for nothing). Shop around on credit cards to trade off interest, vs fees, vs interest free days. Hope this helped.

• 

  Lodapan on 15/07/2015 - 08:59

  So I know how the interest-free period works.

  This doesn't appear to be the case… ;)

  On July 3rd, an interest amount (on the original $500) is charged to my account of say $50

  This won't happen.

  Assuming that you'd paid your previous months' balance in full (the full amount for any spending in May), no interest is charged on any of your June spending until after the due date for that statement period, which in this case would be somewhere around July 25th.

  In the example you gave, the outstanding balance for your card for the June statement period will be $1000. That's the $1500 of spending minus the $500 payment you already made. You'll be issued this bill at the end of June and then have 3 weeks to make the payment. This is where the (up to) 55 day interest free period comes from: For payments made at the start of your statement period (e.g., June 1st), you'll have the full 55 days of no interest charged on that amount. On the other hand, Payments made at the end (June 30th) will only have around 25 days of interest free period.

  In your example there was really no reason to make that $500 early payment unless your credit limit was $1000 and you wanted to make additional purchases on the card.

  As a side note: In the general case, it makes the most sense to pay off the full amount ($1500) on the due date of your credit card bill. You can guarantee that this always happens on the right date by setting up a direct debit and opting to pay the full amount automatically.

  For the second part of the question: Whenever you don't pay the full balance for the statement period, you'll be charged interest during the following statement period on:
  - Any outstanding balance from the previous months: interest compounds daily for the full month
  - Any purchases you make: interest compounds daily from the day you make the purchase forward.

  This is really important to understand: if you ever don't pay the full amount, you lose the interest free period for the account and you'll be charged interest on purchases as soon as you make them. Only when you pay the full amount at the end of the next statement period will you get your interest free period back.

  Interest charges are applied to your account at the end of the statement period and appear as an itemised amount on your credit card bill.

  Whenever you make a payment, the bank will apply that payment against the oldest and highest-interest amounts first. That means that you pay off any previous balance first, then your earliest purchases, etc. The rules are actually more complicated that this because there are different interest rates that apply to cash advances, balance transfers etc.

  As try2bhelpful suggests, read the guide on nab.com explaining how interest is charged on credit cards. Its really thorough and detailed and it wasn't until I read this guide myself that I came to understand all the (somewhat odd) rules that apply to credit cards.

  • 

    oodian on 15/07/2015 - 09:40

    Thanks for that explanation. Do you agree with the advice provided above that if I pay the full amount owing plus interest up to the particular day ('payout figure') then the interest-free period will apply to consequent purchases made before the end of the same period?

    • 

      Lodapan on 15/07/2015 - 22:49

      Nope. The interest free period is all-or-nothing.

      If you don't pay the full amount on time, you'll be charged interest for all the purchases you made for that statement period AND you'll be charged interest for all purchases made in the next months' statement period too. This applies even if you made a late payment for the entire balance on the card. Even then, purchases until the end of the statement period will attract interest.

      This page (http://learn.nab.com.au/how-your-credit-cards-interest-free-…) explains all the details.

      • 

        oodian on 16/07/2015 - 00:25

        I hate to say it, but I think you might be wrong here. I confirmed today with a credit card specialist at my bank that if I pay out the full amount owing plus any accrued interest to that date (referred to as the "payout figure") the interest free period will be reset. There is a thread on Whirlpool about it here: http://forums.whirlpool.net.au/forum-replies.cfm?t=2115151

        I think the advice from @zoombie above is completely accurate.

      • 

        Lodapan on 16/07/2015 - 18:44

        @oodian:

        OK thanks for the info — Good to know.
        I was just going by the NAB guide. Maybe it varies by bank?