Credit card noob with a question

[kuronosan]

Okay so I went through 20 years without a credit card (always stuck with the debit card) and finally caved and got one, but I'm a total noob at it. I read this in the almighty Wikipedia:

"if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received."

Now, I know Wikipedia is well, Wikipedia, but the whole "until the payment is received" thing irks me. Is it basically saying that if you don't pay off the entire purchase with interest, interest will continue to be charged on the $1000 and not the remaining balance? I.e. if I bought a car on credit for $15000 with a monthly interest rate of 3% and paid $14000 of it off, I'd be charged at least $450 in interest every month on that purchase alone until the entire balance+interest on the purchase was paid off?

I dunno, it confuses me. I always thought interest was based on the total balance remaining, not some bullshit original price of purchase. <_<

A car is not a credit card, it's a loan. Regardless, on any loan or credit purchase you are only charged interest on the balance of the account. The exception is specialized interest rates. Say you financed the car for 0% interest for 24 months. If you didn't pay off the balance of the car by the end of the 24 months, you would owe interest on the entire balance paid.

Assuming a balance of $10,000, for example, with an interest rate of 6% APR. You would owe $600 in interest fees annually. If you took the special 0% rate, your interest would be $0. If you paid $2,000 of the car, you would have a remaining balance of $8,000. Now - if you bought the car in January, and still had a balance of $8,000 by the next January... you would still owe $600 in interest fees.

[Kilhart]

A car is not a credit card, it's a loan.

Yeah, I was just using a large purchase with a large balance to ask if you can really be screwed over for that much money if you still haven't paid off the entire balance. I wouldn't actually charge an entire car purchase on my credit card <_<

Assuming a balance of $10,000, for example, with an interest rate of 6% APR. You would owe $600 in interest fees annually. If you took the special 0% rate, your interest would be $0. If you paid $2,000 of the car, you would have a remaining balance of $8,000. Now - if you bought the car in January, and still had a balance of $8,000 by the next January... you would still owe $600 in interest fees.

This is for the car loan, and not the credit card, correct?

[Mizango]

You're officially in the big leagues now.

[Kilhart]

I'm scurred. ;_;

[kuronosan]

My bad, I didn't see that part until you pointed it out for me.

Well, yes. That example was for a car. But, those terms apply to all credit cards. You have to check your terms and conditions, but it's very common for credit cards to do the same.

Say you purchased a $1,000 TV on a Best Buy credit card with 0% APR for 24 months. Normal APR for some credit cards is around 25%. Then, 3 months later, you purchased another $1,000 on the same cards. These two transactions are separate, so paying off one does *not* affect the other's interest rate, as they are separate transactions. The same rules apply, however, if you do not pay off the balance of the purchase by the end of the 24 month period. You would still owe $250 in interest, for example - per transaction unpaid - if you failed to pay off the entire balance.

Lastly, consumer credit cards are a little different. Each bank uses their own terms and conditions, but it's fairly common for the entire balance to have interest on it, with the exception of some special purchases (some banks, such as mine, operate like a store credit card would). This means that if you fail to pay the minimum payment on time, you lose the special interest rate on the balance. This would mean if the balance of that purchase was unpaid, you would owe interest on the entire balance before you made payments.

So technically, you could have a $5,000 balance at 10% normal APR... which would net about $500 a year in interest fees, if left unpaid or you mess up your terms. It doesn't matter if you paid it down to $1.00. If you screw up, you owe all $500 of interest.

And, you can't refuse to pay it either unless you want to mess up your credit. You signed the terms and conditions, so you have no legal recourse. The best thing to do is to always pay your balance down so that they can't send it to collections or take you to court or assess any of those bullshit extra fees you're always stuck paying. One of my card's banks charges you a $6.00 membership fee (instead of a lump annual fee) every month, meaning the balance will never be $0 until I cancel it.

Advice-wise, don't ever open a credit card without reading the terms and conditions dealing with interest, minimum payments, grace periods, annual fees, and APR-accrual. Most people cry lawyer because they never read the terms and fees and then they're surprised when something bites them in the ass.

Also, the best thing to do payment-wise is to see if your bank does automatic-payment-methods (usually called ATF or APM). This way you have written proof that you made a payment and the place can never say they didn't receive it (unless you made a mistake in the address or account number) and it's always sent certified mail by the bank.

[Kilhart]

Say you purchased a $1,000 TV on a Best Buy credit card with 0% APR for 24 months. Normal APR for some credit cards is around 25%. Then, 3 months later, you purchased another $1,000 on the same cards. These two transactions are separate, so paying off one does *not* affect the other's interest rate, as they are separate transactions. The same rules apply, however, if you do not pay off the balance of the purchase by the end of the 24 month period. You would still owe $250 in interest, for example - per transaction unpaid - if you failed to pay off the entire balance.

Lastly, consumer credit cards are a little different. Each bank uses their own terms and conditions, but it's fairly common for the entire balance to have interest on it, with the exception of some special purchases (some banks, such as mine, operate like a store credit card would). This means that if you fail to pay the minimum payment on time, you lose the special interest rate on the balance. This would mean if the balance of that purchase was unpaid, you would owe interest on the entire balance before you made payments.

So technically, you could have a $5,000 balance at 10% normal APR... which would net about $500 a year in interest fees, if left unpaid or you mess up your terms. It doesn't matter if you paid it down to $1.00. If you screw up, you owe all $500 of interest.

Well, I don't mean not paying at all. I'd make well over the minimum payment every month, but I just want to be sure whether or not interest will accrue based on the $2000 or on the remaining balance at the end of 6 months, when my normal APR takes effect.

My specific cardholder agreement says nothing about the original transaction/purchase price anywhere. The only thing it says relevant to the Wikipedia quote I originally posted was that if your entire balance is not paid by the end of the grace period, you will not have a grace period and finance charges will begin to be applied to the balance.

It also says daily finance charges are applied on a daily basis based on the APR and average daily balance and charged to the account at the end of the month. It doesn't say anything about paying interest based on the original purchase price, which is why the article confused me, since it said that most credit cards do charge interest on the original purchase price if it isn't paid off completely by the end of the billing period.

[kuronosan]

Well, I don't mean not paying at all. I'd make well over the minimum payment every month, but I just want to be sure whether or not interest will accrue based on the $2000 or on the remaining balance at the end of 6 months, when my normal APR takes effect.

My specific cardholder agreement says nothing about the original transaction/purchase price anywhere. The only thing it says relevant to the Wikipedia quote I originally posted was that if your entire balance is not paid by the end of the grace period, you will not have a grace period and finance charges will begin to be applied to the balance.

It also says daily finance charges are applied on a daily basis based on the APR and average daily balance and charged to the account at the end of the month. It doesn't say anything about paying interest based on the original purchase price, which is why the article confused me, since it said that most credit cards do charge interest on the original purchase price if it isn't paid off completely by the end of the billing period.

It's just lawyer-talk for "If you don't pay this off by the end of the agreed terms, you owe interest on the entire balance".

The ADB is just the APR rate applied over the course of the year, which is normal for most consumer credit cards.

[Kilhart]

It's just lawyer-talk for "If you don't pay this off by the end of the agreed terms, you owe interest on the entire balance".

The ADB is just the APR rate applied over the course of the year, which is normal for most consumer credit cards.

So, just to clarify, for my card, it's based on BALANCE, and not original purchase price of all transactions left unpaid?

I understand why they would charge interest on the original amount for things like cars, etc., but doing it for credit card purchases makes my head hurt. So they'd have to calculate each purchase I ever made that's still unpaid, individually calculate interest for every single one, and then calculate interest for all the interest and fees still not paid, and then sum it all up? Weird.

But yeah, I'm most interested in the terms for MY card. This isn't the entire cardholder agreement, but:

https://www.accountonline.com/ACQ/Di...F_CODE=&AAPID=

Again, I can't find anything about original transaction amount being used to calculate interest anywhere, but I just want to make sure it's not some default assumption that all credit cards have or something.

[kuronosan]

So, just to clarify, for my card, it's based on BALANCE, and not original purchase price of all transactions left unpaid?

I understand why they would charge interest on the original amount for things like cars, etc., but doing it for credit card purchases makes my head hurt. So they'd have to calculate each purchase I ever made that's still unpaid, individually calculate interest for every single one, and then calculate interest for all the interest and fees still not paid, and then sum it all up? Weird.

But yeah, I'm most interested in the terms for MY card. This isn't the entire cardholder agreement, but:

https://www.accountonline.com/ACQ/Di...F_CODE=&AAPID=

Again, I can't find anything about original transaction amount being used to calculate interest anywhere, but I just want to make sure it's not some default assumption that all credit cards have or something.

Reading that page, I can tell you a few things. First, the 0% is only good for 6 months. That means the entire account, regardless of purchase amount, is going to be 0%. That also means that if you don't have your balance paid off before the end of 6 months, any purchases remaining will be charged full interest. Variable APR sucks ass, dude. That means they can change your APR at any time without your consent.

To clarify, your terms basically state that your card needs to be paid off before the end of the 6 month period - although you can contest in court, since it's not listed, if they charge you for the entire balance. Basically, say you make a $500 purchase one day, then you pay off $400 and make another purchase. At the end of the six months, you pay off $100 more (which would pay the original $500 balance). They (according to their own terms) can't charge you full interest for the $500 balance. You can even tell them that (and do it in writing, not over the phone) if they try to charge you.

All credit balances and debts (whether in collection or not) give you 30 days to dispute. The credit companies know this, so they try to bully you into paying something even if, by the terms and conditions, you don't owe it to them. Don't be afraid to write a letter contesting it. Just have proper documentation ready (ie, keep your credit statements) and be fearless.

[Kilhart]

To clarify, your terms basically state that your card needs to be paid off before the end of the 6 month period - although you can contest in court, since it's not listed, if they charge you for the entire balance. Basically, say you make a $500 purchase one day, then you pay off $400 and make another purchase. At the end of the six months, you pay off $100 more (which would pay the original $500 balance). They (according to their own terms) can't charge you full interest for the $500 balance. You can even tell them that (and do it in writing, not over the phone) if they try to charge you.

Sorry to be a hassle. Just checking: when you say the end of the six months, do you mean immediately before the 6 month period ends, or immediately after? o_o

[kuronosan]

If your payment is not processed by the last day of the 6-month period (which begins upon activation) then you are still charged full interest *unless* you are within the grace period.

[Kilhart]

Okay, so full interest on the $500, not on the $100 remaining? Weird.

[kuronosan]

Best thing to do is to call CitiGroup and specifically ask them.

[Kilhart]

Okeh. :<

[Norellicus]

First off, variable APRs don't mean they're going to change the rate on a whim, it means they use the WSJ Prime Rate to determine your APR for the month. Most banks add a fixed value to the prime rate but this one seems to just go straight off the prime (better for you) (Edit: Sorry, I missed the part below it, this one is like any other - Prime Rate plus 9.99). It's really not a big deal, it just means your card can be more expensive as the market shifts. Fixed APRs just mean you'll always be charged X rate for the life of the member agreement; the bank can still change the APR, they simply have to notify you so you have the option to cancel your member agreement.

Second, your interest is being calculated by average daily balance, which is as simple as it sounds: sum the daily balance of the card every day in the billing cycle, and divide the result by the total number of days in the cycle. This is the number that you will be charged interest on. So if you have a $200 balance and make no purchases for an entire month, you will be charged on $200 (at 13.4% that's $26.80); then if we assume you make a $50 payment when the bill comes, and then the next month make a purchase of $150, you're going to be charged interest on $243.47 (226.80 to start the cycle, 176.80 after your payment, and finally 326.80 after your purchase, divide by 3; you can truncate the dates where the balance doesn't actually change since we're finding an average), so forth and so on. Keep in mind that the balance is likely calculated once per day and not per transaction, so if you have money going in and out on the same day it will use the result at the end of business on that date, not the balance reported for every single transaction on your bill.

As for your six month 0%, you will be charged interest on the balance starting on day 1 of the 7th billing cycle. It is not retroactive in this case (though some cards are, you have to be careful about "0%" or "same as cash" offers; this usually occurs on store CCs more than big banks), so even if you had some thousands of dollars in purchases in the first 6 months, if your balance is only $100 at the beginning of the 7th month you're fine. But keep in mind that means you need to pay down the heavy balance in the SIXTH month so the balance is already low when month 7 begins.

And keep in mind grace periods occur per transaction - if you buy something on the first of the month and post a payment for the total sum of the purchase on the 21st, the transaction will still have been counted in the daily balance. Had you posted the payment on the 19th, it wouldn't. It's hard to say whether they'll tag you for the full sum of the purchase (like store CCs do as I mentioned) or simply the remaining balance if you make partial payments; some places don't start charging interest until the end of the grace period, while others "withhold" interest for the duration of the grace period. The terms on that page simply state that they will revoke your grace period (and thus start charging interest on purchases from day 1) if you miss payments or don't pay down the full balance.

[Khamsin]

then if we assume you make a $50 payment when the bill comes, and then the next month make a purchase of $150, you're going to be charged interest on $243.47 (226.80 to start the cycle, 176.80 after your payment, and finally 326.80 after your purchase, divide by 3; you can truncate the dates where the balance doesn't actually change since we're finding an average)

Wouldn't it make a difference when the transaction was made? Can't simply divide by 3 since making a purchase on the last day of the cycle affects your average daily balance much less than if it were made at the beginning.

[Norellicus]

Are you sure? I don't think it does, since it's a sum total before averaging. There *may* be a slight difference between it if you fill the sum total with all the dates where there is no balance change and divide by 30, but I'd be willing to bet it's beyond the fractional limit of actually costing you more money.

[Khamsin]

Are you sure? I don't think it does, since it's a sum total before averaging. There *may* be a slight difference between it if you fill the sum total with all the dates where there is no balance change and divide by 30, but I'd be willing to bet it's beyond the fractional limit of actually costing you more money.

What I mean is, if you start at $0 and have $0 through most of the month and then make a $3000 purchase at the end of the cycle, your average daily balance would be $100. If you make that same $3000 purchse at the beginning of the cycle instead, and maintain that $3000 balance through the month, your average daily balance would be $3000.

You didn't change how much you spent through the month, only when you made the transaction.

[Norellicus]

Ooh, I see what you mean. Yeah, it would matter. Still, for most people it would get pretty close.

[Rhinox]

I learned the hard way to stay away from CC's if you can't pay the bill within at most the month.