How Credit Cards Work

Welcome to a new decade. I’m going to start it off by talking about the way credit cards work, because I received a number of emails over the holidays complaining about excessive fees.

Be aware that unless the credit card balance on your latest statement is paid in full before the due date, interest will be payable. Now the first catch here is that the payment must be received by the institution on or before the due date. Some people tell me that they had made the payment in full by B pay on the due date, and yet had still copped interest. This is because it can take a couple of days for the proceeds to reach the institution that issues the credit card. So, the first rule is to pay your card in full well before the due date to give the money time to reach the institution.

The next basic is that this rule applies even if you make a small mistake. For example, if your closing balance is $4300, and you mistakenly pay $4200, you will be treated as if the entire balance was not paid on the due date – interest will be charged at around 20%. So, if you receive your credit card statement, and notice to your horror, that you have been charged interest check to see that you did in fact pay the entire balance, and that you also allowed enough time for the funds to be received by the issuing institution.

This has happened to me occasionally, and I have always telephoned the credit card company immediately, and asked for leniency because it was a genuine tiny mistake, and I have been meticulous in paying my account in full before the due date in the past. I have never failed to have the interest refunded when this happened.

But there’s another catch. Once you are in arrears, it is like being on a treadmill. The interest on your credit card statement applies only to transactions made before the statement close off date. Even if they do waive interest, the computer will calculate interest on transactions made between the previous statement date and the date you got the account back in order. Make sure you discuss this when you are dealing with the credit card people.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.