Mother Knows Best

My mom always repeated two things to me about money ever since I was a kid.

1. Never buy things you can’t afford.

and

2. Always pay off your credit card every month.

Like a good little boy, I listened obediently and ever since I got a credit card, I never missed a payment…

up until recently.

Oops, I got a bit unorganized and was hit with a $14 interest charge.

A bit sad that I ruined my perfect streak and also thinking that $14 was kind of high for my balance, I started doing a little bit of homework on how credit card companies charge interest. At first I was a little embarrassed that I didn’t know these basic facts about credit cards, something we use so frequently, but then I asked around and a lot of other people didn’t know either.

So in case you didn’t know either, I hope this helps.

*This probably won’t apply to all credit cards, since they all vary, but I think the general idea is the same.

So let’s say the bill cycle is July 1st to July 31st. On July 31st your bill closes, and your bill, which includes everything you purchased in that month, will be due on the due date… let’s say August 15th. However, when August 1st starts, the credit card company will start calculating interest (compounded daily) on everything you buy between the 1st and the 15th of August. If you pay off your balance (July 1st – 31st) by August 15th, you don’t get charged any interest.

But, if you fail to pay the balance off, not only will you get charged interest for the July purchases, you will also be charged for interest on what you bought between August 1st and 15th.  So basically you’d be paying an extra 15 days worth of interest opposed to paying no interest at all (if you just paid in full).

Crazy right? Actually, what’s crazy is how I am 23 years old and didn’t even know that. Ironically, the credit card customer service rep I talked to didn’t know either.

Another thing I didn’t know is that they compound your interest daily. So there’s actually a difference between something you bought 20 days ago versus something you bought 5 days ago even if it’s the same price and in the same billing cycle. Also a lot of credit companies take your daily average balance to calculate interest. Basically they take your balance at the end of each day, add it together, then divide it by the number of days in the month. Then they use this number as the base to calculate your interest charge. But, I guess none of this would really matter if you just do one thing…

Listen to my mom and pay off your credit card in full every month.

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