Credit Cards: The Bill With Two Numbers
I opened my card app this morning, and it says I owe two thousand dollars. Then the big button says forty dollars due. Which number is the real one?
0:00 / 7:52
Credit Cards: The Bill With Two Numbers
Two numbers on the same bill
Your card app can show $2,000 owed and $40 due on one screen. Both numbers are real. A credit card is a standing offer to borrow up to a limit, so each purchase is money borrowed. The bill then carries a running balance next to a minimum payment. 1
Why the app and the bill disagree
A billing cycle closes on a statement date. Purchases from before that date belong to this statement, and purchases after it wait for the next one. The payoff figures printed on your statement are built from your balance on that date, with no allowance for later purchases. 2
The grace period on purchases
The grace period is the stretch between the end of the billing cycle and the day your payment is due. Card companies are not required to give one, but most cards offer one on purchases. When you pay your balance in full by the due date, and you were not already carrying a balance, you avoid interest on those purchases. 3
The bill has to reach you at least 21 days before the payment is due, so the window is a real one. 3
The grace period normally covers purchases only. With a cash advance, or a check drawn on the card account, interest generally starts on the transaction date. A statement also has to show each kind of balance separately, with its own rate, because a cash advance and a purchase are not the same deal. 4
What carrying a balance costs
Once you carry a balance, most companies charge interest from the billing date onward until your payment reaches them. Once a company starts charging interest, it keeps charging until the money arrives. 5 That is why paying the whole bill can still leave a small interest charge on the following statement.
Many issuers do the arithmetic daily. Divide the annual rate by the days in the year, multiply by the balance carried that day, and add the result to the balance. Interest then compounds every day. 46
A made-up example shows the shape of it. Take $2,000 at 22% and a $40 minimum payment. Twenty-two percent across a year is about six hundredths of a percent a day, roughly $1.20 a day on $2,000, or $36 in a month. Paid against the minimum, that leaves about $4 coming off the balance. The figures are invented; the arithmetic is the point.
Why the minimum payment is so small
Card issuers must print two figures next to your minimum payment. One is how long it would take to clear your current balance paying only the minimum. The other is how much you would need to pay each month to clear it in 36 months. 2
You do not have to pay more than the minimum. The more you pay each month, the less interest you pay over time. 2 Anything you pay above the minimum generally goes to the balance with the highest rate first. 4
The due date is an arrival deadline
A payment generally cannot be treated as late if it arrives by 5 p.m. on the due date, in the time zone printed on your statement. When the due date falls on a Sunday or a holiday, you have until 5 p.m. on the next business day. An issuer may also set an earlier cut-off for online payments. 7
What to do with the bill
Find the statement balance and the minimum payment on the same page, and decide which one you are paying before the due date. Paying the statement balance keeps the grace period on purchases. Paying only the minimum keeps the account open and the interest running. Which of the two fits your situation is yours to judge. This episode is educational only and is not registered investment advice.
References
- 1CFPB: Credit cards key terms
consumerfinance.gov
- 2
- 3CFPB: What is a grace period for a credit card?
consumerfinance.gov
- 4
- 5
- 6CFPB: What is a daily periodic rate on a credit card?
consumerfinance.gov
- 7CFPB: When is my credit card payment considered late?
consumerfinance.gov
This story was produced automatically by a channel. One sentence is all it takes for Neodrop to keep producing for you.