# Explain to me credit card interest

#### longskate88

##### Distinguished Member
Dumb question for you all. I've had a CC for about 3 years (I'm 21) and have paid it in full, every month, forever. For the first time, I'll be not paying it all off this month, about \$150 will remain until next month.

Can someone explain how they calculate the interest, whether it will be only on the \$150, or on everything I charge this coming month?

i.e, Assuming a 12% APR (thus 1% per month) will I be paying \$1.50 in finance charges on my bill next month, or will it be 1% of everything I charge in the coming month? Say I charge \$500 next week, will the 1% apply to that as well?

Seems to me like it should only be on the \$150, since that balance will be carried for more than month, and the new stuff should not be subject to interest since it won't be on there more than a month.

Thanks for the help!

#### Dakota rube

##### Stylish Dinosaur
This is the beginning of the end for you.
Sorry to have to break the news...

#### Tarmac

##### Distinguished Member
typically, it will be your entire balance.

Think of it like this, where there is a choice of charging you less fees or more, the card company will always charge you more.

Also, the 12%APR = 1% monthly isn't exactly right, but it's an okay estimate.

You should NEVER be charging new charges on a card with a balance. I have carried a balance before but when I do, I stop using that card. Use another card which will be paid off. Don't use that first card again until it is paid off.

#### The Louche

##### Distinguished Member
Originally Posted by Tarmac
typically, it will be your entire balance.

Think of it like this, where there is a choice of charging you less fees or more, the card company will always charge you more.

Also, the 12%APR = 1% monthly isn't exactly right, but it's an okay estimate.

You should NEVER be charging new charges on a card with a balance. I have carried a balance before but when I do, I stop using that card. Use another card which will be paid off. Don't use that first card again until it is paid off.

+1

Without offending anyone I must say a little piece. First, you seem pretty smart for your age - I knew a lot of stupid kids in college that used credit cards at will. The fact that this is the first time you've every carried a balance forward is good - continue to make this a rare circumstance. The advice quoted above is good too - take this card out of your wallet and hide it until you have paid it in full.

I can't pretend to be the thriftiest guy in the world, or any kind of expert on personal finance. I too, on occasion, have carried a very modest balance forward on my credit card. But the occasion is rare and I feel a little sick when it happens. I feel that my financial picture is worlds better than most of my friends b/c I have this attitude as well. Most of my friends spend their time servicing debt and not saving; they'll never retire. Take advantage of the good financial sense that you've exercised up to this point as you move forward in life. Credit cards should be used for little more than building a credit history. Sometimes life throws you little surprises like car repairs and its nice to have a bit of a credit cushion in those times. But don't get presumptuous at your young age. Its actually very simple - if you can't afford something don't buy it. It's that easy.

Look at the economy we are living in. One of the major reasons we are in this mess is because people got used to buying things they couldn't afford. Now everyone is fucked - even those that acted with relative responsibility.

#### longskate88

##### Distinguished Member
Originally Posted by The Louche
+1

Without offending anyone I must say a little piece. First, you seem pretty smart for your age - I knew a lot of stupid kids in college that used credit cards at will. The fact that this is the first time you've every carried a balance forward is good - continue to make this a rare circumstance. The advice quoted above is good too - take this card out of your wallet and hide it until you have paid it in full.

I can't pretend to be the thriftiest guy in the world, or any kind of expert on personal finance. I too, on occasion, have carried a very modest balance forward on my credit card. But the occasion is rare and I feel a little sick when it happens. I feel that my financial picture is worlds better than most of my friends b/c I have this attitude as well. Most of my friends spend their time servicing debt and not saving; they'll never retire. Take advantage of the good financial sense that you've exercised up to this point as you move forward in life. Credit cards should be used for little more than building a credit history. Sometimes life throws you little surprises like car repairs and its nice to have a bit of a credit cushion in those times. But don't get presumptuous at your young age. Its actually very simple - if you can't afford something don't buy it. It's that easy.

Look at the economy we are living in. One of the major reasons we are in this mess is because people got used to buying things they couldn't afford. Now everyone is fucked - even those that acted with relative responsibility.

Thanks, I'd like to think I'm pretty smart for my age
. I laugh and cringe at the same time when I see kids I know buying brand new cars while still making minimum wage, knowing that they're getting hosed on the interest.

Makes sense to use another card until this one is paid off next month, though would the interest amount still be very small? Say I charge \$500 this month + \$150 from last, that would still only be \$6.50 in interest, correct?

Thanks all, whenever I think about buying something I should go watch George Carlin's special on "Stuff." Good way to put things in perspective

#### Bhowie

##### Stylish Dinosaur
Effective rate for period = (1 + annual rate)(1 / # of periods) - 1

#### Tarmac

##### Distinguished Member
Originally Posted by longskate88
Makes sense to use another card until this one is paid off next month, though would the interest amount still be very small? Say I charge \$500 this month + \$150 from last, that would still only be \$6.50 in interest, correct?

It sounds like you don't have another credit card.

Are you 100% sure you are going to pay off the \$657 balance next month?

If so, why wouldn't you just pay cash for the \$500 you have to spend this month?

If you don't pay it off, the \$657 will turn into \$665 + new charges in 2 months (\$665 + \$500+\$5)

Why would you pay \$505 when you can pay \$500?

#### longskate88

##### Distinguished Member
Originally Posted by Tarmac
It sounds like you don't have another credit card.

Are you 100% sure you are going to pay off the \$657 balance next month?

If so, why wouldn't you just pay cash for the \$500 you have to spend this month?

If you don't pay it off, the \$657 will turn into \$665 + new charges in 2 months (\$665 + \$500+\$5)

Why would you pay \$505 when you can pay \$500?

I have one other card (thru Ebay) I never use, but the convenience of one bill and one running balance is probably worth the \$5. I also don't plan to spend \$500 this month...trying to cut back.

To be honest, I used to think the 12% APR was applied every MONTH...I had a very bad image of people who didn't pay in full every month
. Knowing that it's only 1-2% is more comforting to know an emergency woulnd't cost a fortune, but it's still no fun paying for money.

#### The Louche

##### Distinguished Member
Originally Posted by Tarmac
It sounds like you don't have another credit card.

Are you 100% sure you are going to pay off the \$657 balance next month?

If so, why wouldn't you just pay cash for the \$500 you have to spend this month?

If you don't pay it off, the \$657 will turn into \$665 + new charges in 2 months (\$665 + \$500+\$5)

Why would you pay \$505 when you can pay \$500?

Again, good point. If you have the money now, pay the freaking card off.

Yes - the actual dollar amounts of the interest charges you're looking at right now are very small - less than \$10 either way. But that's not the point. The point is that you have been much smarter than most 21 year old idiots are with money. Continue being smart by saving, not spending, and you will find yourself much happier in the long run.

In fact, if you can keep restraining yourself from foolish spending now, you will actually have a little bit of money to spend before you know it. By entering the work world debt free you can use some of your income to buy clothes and still have some left to save! Your friends will have so much debt when they get jobs that they'll have to use every spare penny to pay it off. They won't have enough left to save, and thus the cycle continues.

A penny saved is a penny earned.

#### longskate88

##### Distinguished Member
Originally Posted by The Louche
Again, good point. If you have the money now, pay the freaking card off. Yes - the actual dollar amounts of the interest charges you're looking at right now are very small - less than \$10 either way. But that's not the point. The point is that you have been much smarter than most 21 year old idiots are with money. Continue being smart by saving, not spending, and you will find yourself much happier in the long run. In fact, if you can keep restraining yourself from foolish spending now, you will actually have a little bit of money to spend before you know it. By entering the work world debt free you can use some of your income to buy clothes and still have some left to save! Your friends will have so much debt when they get jobs that they'll have to use every spare penny to pay it off. They won't have enough left to save, and thus the cycle continues. A penny saved is a penny earned.
Was going to edit my above post, but yes, I agree. I'm hoping to graduate with no loans or debt (state college, mind you). I won't be making enough to afford to pay back debts!
Hell, I'm thinking about selling my Breitling and buying a Swiss Army or something (still a very nice watch, their new models esecially) and putting the diff. in my RothIRA (aftr paying off the CC balance of course
). It's so hard to do though...and to think I laugh at the materialistic people I know. Damn watch addiction
, but they're one of my only vices as far as money goes...no cars, no electronics, not much on clothes or alcohol, etc.

#### The Louche

##### Distinguished Member
Originally Posted by longskate88
Was going to edit my above post, but yes, I agree. I'm hoping to graduate with no loans or debt (state college, mind you). I won't be making enough to afford to pay back debts!

Hell, I'm thinking about selling my Breitling and buying a Swiss Army or something (still a very nice watch, their new models esecially) and putting the diff. in my RothIRA (aftr paying off the CC balance of course
).

It's so hard to do though...and to think I laugh at the materialistic people I know. Damn watch addiction
, but they're one of my only vices as far as money goes...no cars, no electronics, not much on clothes or alcohol, etc.

Part of a succesful personal financial management strategy is to allow yourself a few luxuries. As long as you are still saving a sensible amount, don't get too wrapped-up in a few splurges here and there - especially if you are 100% debt free. If you get too concerned with saving every possible cent you'll do little more than make yourself an uncomfortable recluse. Nobody's going to judge you for having a mortage and nobody's going to judge a young guy for taking a car loan. They key is to take a mortgage that you can afford, not some subprime cluster **** on a McMansion, and buying a sensible car like a cool little Honda, not a M model BMW.

It is very clear to me that your head is on straight. Just keep it as such and you'll be fine.

#### sho'nuff

##### grrrrrrrr!!
Originally Posted by longskate88
Dumb question for you all. I've had a CC for about 3 years (I'm 21) and have paid it in full, every month, forever. For the first time, I'll be not paying it all off this month, about \$150 will remain until next month.

Can someone explain how they calculate the interest, whether it will be only on the \$150, or on everything I charge this coming month?

i.e, Assuming a 12% APR (thus 1% per month) will I be paying \$1.50 in finance charges on my bill next month, or will it be 1% of everything I charge in the coming month? Say I charge \$500 next week, will the 1% apply to that as well?

Seems to me like it should only be on the \$150, since that balance will be carried for more than month, and the new stuff should not be subject to interest since it won't be on there more than a month.

Thanks for the help!

you are not paying 12% interest only on the amount that is remaining.

if you do not pay the balance in full for that statement on or before due date, what happens is they calculate the percentage of interest accrued daily.

let say you have a balance of 1000 dollars from the beginning of the statement period. you wait till the due date (30 days later) to pay off 850 dollars and you have 150 dollars remaining in balance.
the interest they will charge you is not 12% apr divided by 12 months for the 150 remaining amount only.
the interest will be 12% apr divided by 365 days for the amount that existed on every day of that statement period.

so it is not just \$1.50, but more like \$10 because the average daily balance was at 1000 dollars until the last day when you paid it down to 150.

this is where alot of people get confused about their APR on credit cards. if you want more of an explanation ( i know above is not to clear) i will explain.

##### Stylish Dinosaur
Don't use the card if you can help it until you've paid it off.

#### evor1

##### Active Member
your new purchases fall on a totally different months statement. those purchases will not be factored in when computing the interest.

#### JayJay

##### Stylish Dinosaur
Don't use the card if you can help it until you've paid it off.
+1

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