I often find myself answering this question.
I recently found myself embroiled in a debate and conversation with my own credit card company regarding an interest charge.
It was only $13.
00 but I wanted to get to the bottom of this great misunderstand and regular debate as a public service to my clients.
The following is the explanation and example courtesy of my Citibank card services representative.
When you agree to accept a credit card you are agreeing that you will pay the amount they are loaning you for that month [or "billing cycle"] back in full or you will pay interest on the entire amount regardless of how much you have paid [down or off].
You will continue to pay that interest until that amount is paid off.
If you use the card in the meantime, say the next month [billing cycle] that will also be added on and usually to the end.
So you will not be able to pay on that amount until you pay off the prior amount.
Example: January you have a credit card with a $2000 limit & 22% interest rate.
You charge up $2,000 on that card during January.
The bill comes at the end of the month and you pay $1,000 of that bill.
February you will pay 22% on the total $2,000 because you said you would.
You also agreed that you would pay 22% until that original amount is paid off.
If you didn't use the card and you paid the final $1,000 off when your February statement came, you would be paying the $1,000 plus 22% interest on the $2,000.
If during March if you still have not charged more on the card you would potentially have the interest for the $1,000 at 22% interest and be done.
What About Balance Transfers? Tragically most people don't know this, nor do they understand that by charging more on this card the problem just continues to compound and snowball.
Hence, the statement often comes up, "I should be OK because I rolled mine over to a "0%" card for 1 year [or some other specific term].
That is fine, however, there are two additional pitfalls which can [and do] significantly change this ideal temporary recovery window.
First, you potentially will have to pay a fee, typically this is a percentage of the balance transferred.
If it is a large balance, this will equate to a large amount.
Second, if you use this [new 0%] card after you have rolled over debt from another card, you will have to pay off the transferred balance prior to beginning to pay on the new charges you have added which are accruing at whatever the assessed rate of the card will be following the "one year zero interest period" ends.
The following example is courtesy of one of my clients.
Example: The client transferred $20,000 from a high interest credit card to a zero interest credit card for 12 months.
He was short on cash one evening and strictly and out of convenience, he used this [new card] for the dinner bill of $70.
00 bucks.
After speaking with the card services rep.
he was informed of the following.
In the agreement he signed for this [new] card, he agreed that the balance transfer amount would be assessed at 0% interest.
However, if he uses this card the charges would "hunt to the end" or come behind the $20,000 to pay off,if you will.
Meaning, the $20,000 is at 0% interest but the $70 which he could not pay off until the $20,000 is paid off, is accruing at 29% and would continue to do so until the initial $20,000 is completely paid off.
Only after this initial transfer was paid off, would the client be able to pay off the $70 plus interest at that point.
NOTE: "Billing Cycle [which is yet another way you can get hung up but we'll address at another time].