Interest on Amount Exceeding CC Balance?
"In the US, if your monthly statement was issued by the credit card company on January 1 and it showed a balance of $1000, then a payment must be made towards that balance by January 25 or so, not February 1 as you say, to keep the card in good standing. The minimum payment required to keep the card in good standing is specified in your monthly statement, and failure to meet this requirement can trigger various consequences such as an increase in the interest rate charged by the credit card company. With regard to interest charges, whether your purchase of $2000 on  January 3 is charged interest or not depends entirely on what happened the previous two months.  If you had paid both your monthly statements dated November 1 and December 1 of the previous year in full by the their respective due dates of November 25 and December 25, and the $1000 balance on the January 1 statement is entirely due to purchases (no cash advances) made in December, then you will not be charged interest on your January purchase of $2000 as long as you pay it off in full by February 25 (the charge will appear on your February 1 statement). But, if you had not paid your December 1 statement in full by December 25, then that $1000 billed to you on January 1 will include  purchases made during December finance charges on the unpaid balance from the previous month  plus finance charges on the purchases made during December. The finance charges will continue to accumulate during January until such time as you pay off the bill in full (these charges will appear on your February 1 statement), hopefully by the due date of January 25. But even if you pay off that $1000 in full on January 25, your charge of $2000 on January 3 will start to accumulate finance charges as of the day it hits the account and these finance charges will appear on your February 1 statement.  If you paid off that $1000 on January 10, say, then maybe there will be no further finance charges on the $2000 purchase on January 3 after January 10 but now we are getting into the real fine print of what your credit card agreement says. Ditto for the case when you pay off that $1000 on January 2 and made the $2000 charge on January 3. You most likely will not be charged interest on that $2000 charge but again it depends on the fine print. For example, it might say that you will be charged interest on the average of the daily balances for January, but will not be charged interest on purchases during the February cycle (unless you miss the February 25 payment and the whole cycle starts all over again). As a general rule, it takes two monthly cycles of payment in full by the due date before one gets into the state of no finance charges for new purchases and effectively an ""interest-free"" loan of $2000 from January 3 (date of purchase) till February 25 (due date of payment).  Matters become more complicated when cash advances are taken from a credit card which are charged interest from the day they are taken but don't trigger finance charges on new purchases or the so-called ""zero percent balance transfer offers"" are accepted." "The best answer to this is: Read the fine print on your credit card agreement. What is common, at least in the US, is that you can make any charges you want during a time window.  When the date comes around that your statement balance is calculated, you will owe interest on any amount that is showing up as outstanding in your account.  Example...  To revise the example you gave, let's say Jan 1. your account balance was $0. Jan. 3rd you went out and spent $1,000.  Your account statement will be prepared every XX days... usually 30. So if your last statement was Dec. 27th, you can expect your next statement to be prepared ~Jan.24 or Jan. 27.  To be safe, (i.e. not accrue any interest charges) you will want to make sure that your balance shows $0 when your statement is next prepared.  So back to the example you gave--if your balance showed $1,000... and you paid it off, but then charged $2,000 to it... so that there was now a new set of $2,000 charges in your account, then the bank would begin charging you interest when your next statement was prepared.  Note that there are some cards that give you a certain number of days to pay off charges before accruing interest... it just goes back to my saying ""the best answer is read the fine print on your card agreement."""
Suppose you have been paying interest on previous charges in the past. Your monthly statement is issued on April 12, and (since you just received your income tax refund), you pay it off in full on April 30.  You don't charge anything to the card at all after April 12.  Thus, on April 30, your credit card balance  shows as zero since you just paid it off.  But your April 12 statement billed you for interest only till April 12.  So, on May 12, your next monthly bill will be for the interest for your nonzero balance from April 13 through April 30. Assuming that you still are not making any new charges on your card and pay off the May 12 bill in timely fashion, you will finally have a zero bill on June 12. What if you charge new items to your credit card after April 12? Well, your balance stopped revolving on April 30, and that's when interest is no longer charged on the new charges. But you do owe interest for a charge on April 13 (say) until April 30 when your balance is no longer revolving, and this will be added to your bill on May 12. Purchases made after April 30 will not be charged interest unless you fall off the wagon again and don't pay your May 12 bill in full by the due date of the bill (some time in early June). There is no interest outstanding, per se.  There is only principal outstanding.  Initially, principal outstanding is simply your initial loan amount. The first two sections discuss the math needed - just some arithmetic. The interest that you owe is typically calculated on a monthly basis.  The interested owed formula is simply (p*I)/12, where p is the principal outstanding, I is your annual interest, and you're dividing by 12 to turn annual to monthly. With a monthly payment, take out interest owed.  What you have left gets applied into lowering your principal outstanding.  If your actual monthly payment is less than the interest owed, then you have negative amortization where your principal outstanding goes up instead of down. Regardless of how the monthly payment comes about (eg prepay, underpay, no payment), you just apply these two calculations above and you're set.  The sections below will discuss these cases in differing payments in detail. For a standard 30 year fixed rate loan, the monthly payment is calculated to pay-off the entire loan in 30 years.  If you pay exactly this amount every month, your loan will be paid off, including the principal, in 30 years.  The breakdown of the initial payment will be almost all interest, as you have noticed.  Of course, there is a little bit of principal in that payment or your principal outstanding would not decrease and you would never pay off the loan. If you pay any amount less than the monthly payment, you extend the duration of your loan to longer than 30 years.  How much less than the monthly payment will determine how much longer you extend your loan.  If it's a little less, you may extend your loan to 40 years.  It's possible to extend the loan to any duration you like by paying less.  Mathematically, this makes sense, but legally, the loan department will say you're in breach of your contract. Let's pay a little less and see what happens.  If you pay exactly the interest owed = (p*I)/12, you would have an infinite duration loan where your principal outstanding would always be the same as your initial principal or the initial amount of your loan.   If you pay less than the interest owed, you will actually owe more every month.  In other words, your principal outstanding will increase every month!!!  This is called negative amortization.  Of course, this includes the case where you make zero payment.  You will owe more money every month. Of course, for most loans, you cannot pay less than the required monthly payments.  If you do, you are in default of the loan terms. If you pay more than the required monthly payment, you shorten the duration of your loan.  Your principal outstanding will be less by the amount that you overpaid the required monthly payment by.  For example, if your required monthly payment is $200 and you paid $300, $100 will go into reducing your principal outstanding (in addition to the bit in the $200 used to pay down your principal outstanding).  Of course, if you hit the lottery and overpay by the entire principal outstanding amount, then you will have paid off the entire loan in one shot! When you get to non-standard contracts, a loan can be structured to have any kind of required monthly payments.  They don't have to be fixed.   For example, there are Balloon Loans where you have small monthly payments in the beginning and large monthly payments in the last year.   Is the math any different?  Not really - you still apply the one important formula, interest owed = (p*I)/12, on a monthly basis.  Then you break down the amount you paid for the month into the interest owed you just calculated and principal.  You apply that principal amount to lowering your principal outstanding for the next month. Supposing that what you have posted is accurate, the most likely scenario is that you have a structured 5 year car loan where your monthly payments are smaller than the required fixed monthly payment for a 5 year loan, so even after 2 years, you owe as much or more than you did in the beginning!  That means you have some large balloon payments towards the end of your loan.  All of this is just part of the contract and has nothing to do with your prepay. Maybe I'm incorrect in my thinking, but I have a question about   prepaying a loan. When you take out a mortgage on a home or a car   loan, it is my understanding that for the first years of payment you   are paying mostly interest. Correct. So, let's take a mortgage loan that allows prepayment without penalty.   If I have a 30 year mortgage and I have paid it for 15 years, by the   16th year almost all the interest on the 30 year loan has been paid to   the bank and I'm only paying primarily principle for the remainder of   the loan. Incorrect.  It seems counter-intuitive, but even in year 16, about 53% of your monthly payment still goes to interest!!!  It is hard to see this unless you try to do the calculations yourself in a spreadsheet. If suddenly I come into a large sum of money and decide I want to pay   off the mortgage in the 16th year, but the bank has already received   all the interest computed for 30 years, shouldn't the bank recompute   the interest for 16 years and then recalculate what's actually owed in   effect on a 16 year loan not a 30 year loan? It is my understanding   that the bank doesn't do this. What they do is just tell you the   balance owed under the 30 year agreement and that's your payoff   amount. Your last sentence is correct.  The payoff amount is simply the principal outstanding plus any interest from (p*I)/12 that you owe.  In your example of trying to payoff the rest of your 30 year loan in year 16, you will owe around 68% of your original loan amount. That seems unfair. Shouldn't the loan be recalculated as a 16 year   loan, which it actually has become? In fact, you do have the equivalent of a 15 year loan (30-15=15) at about 68% of your initial loan amount.  If you refinanced, that's exactly what you would see.  In other words, for a 30y loan at 5% for $10,000, you have monthly payments of $53.68, which is exactly the same as a 15y loan at 5% for $6,788.39 (your principal outstanding after 15 years of payments), which would also have monthly payments of $53.68. A few years ago I had a 5 year car   loan. I wanted to prepay it after 2 years and I asked this question to   the lender. I expected a reduction in the interest attached to the car   loan since it didn't go the full 5 years. They basically told me I was   crazy and the balance owed was the full amount of the 5 year car loan.   I didn't prepay it because of this. That is the wrong reason for not prepaying.  I suspect you have misunderstood the terms of the loan - look at the Variable Monthly Payments section above for a discussion.   The best thing to do with all loans is to read the terms carefully and do the calculations yourself in a spreadsheet.  If you are able to get the cashflows spelled out in the contract, then you have understood the loan. Not sure if this is possible... It is possible! It is called a balance transfer card and most of the major credit card companies offer them. It is possible to save a significant amount on interest during the grace period. However... Is this a viable option? Not really. Any card will charge you an upfront fee of 3% to 5% of the balance you are transferring. This really only buys you some time in case you are about to fall behind on payments. For many people it's just a way to shuffle around debt, digging themselves a little deeper into consumer debt with each transfer. "No. That's pretty unlikely. Card issuers typically base your rate on your credit score. Paying down debt reduces your percent of available credit used, and improves your score until you are in the 1-20% range. That's optimum. To this issuer, you are one of a million customers, there's no emotion in this, just numbers to them. For what it's worth, if a card issuer raises your rate, you are permitted to ""not accept"" the rate, stop using the card for new charges, and pay at the current rate. Of course this doesn't apply to zero interest deals, only to increases to your regular rate." "A credit card is basically a ""revolving"" loan, in which you're allowed to borrow up to a certain amount (the limit), and any time you borrow, you pay interest.  If you were to *borrow* $100 to pay for something via a credit card, you'd have a $100 balance on the card. If you then pay $70 cash to the card, there would be $30 remaining.  That $30 balance could accrue interest. The timing of that interest charge could vary. The 20% you've quoted is almost certainly ""APR,"" of which the ""A"" stands for ""annual,"" so that 20% would be an annual rate.  It makes the most sense, mind you, to keep a minimal balance on a credit card, as the interest rate is higher than most other loans." I am super sorry about your divorce and nod to you for taking care of your kids and spouse.  This may sound super snarky, although not my intention, but you have an income problem.  Despite making almost double the national average, you are supporting two households, and live in a high cost of living area.  (BTW been there, done that and also in IT.) The best way to avoid paying CC interest is to pay them off, and cut them up.  Some might poo-poo the idea as you can earn some $ by getting CC rebates, but you are not in that mode right now.  Consolidations, and balance transfers are a losing game as you can probably feel the November deadline looming.      If I was you, I would get a second job, even if it was something like pumping gas.  Making an extra $500/month increases your balance reduction by 650%.  Sell stuff.  Recently an older version of Visual Studio, that was sitting unused on my shelf, went for $400 on Ebay.   The best way to solve this problem is through sweat equity.  There are no easy answers.  It sucks, but putting your big boy pants on and being prepared to work 20 hours of the day is the easiest way out of this.   If you do this you will learn a lesson about CC utilization that most don't learn. "No. Credit card companies will typically not care about your individual credit card account. Instead they look either at a ""package"" of card accounts opened at roughly the same time, or of ""slices"" of cardholder accounts by credit rating. If an entire package's or slice's balance drops significantly, they'll take a look, and will adjust rates accordingly (often they may actually decrease rates as an incentive to increase you use of the card). Because credit card debt is unstructured debt, the bank cannot impose an ""early payment penalty"" of any kind (there's no schedule for paying it off, so there's no way to prove that they're missing out on $X in interest because you paid early). Generally, banks don't like CC debt anyway; it's very risky debt, and they often end up writing large balances off for pennies on the dollar. So, when you pay down your balance by a significant amount, the banks breathe a sigh of relief. The real money, the stable money, is in the usage fees; every time you swipe your card, the business who accepted it owes the credit card company 3% of your purchase, and sometimes more." "There are other good answers to the general point that the essence of what you're describing exists already, but I'd like to point out a separate flaw in your logic: Why add more complications so that ""should I call this principal or interest"" actually makes a difference? Why's the point (incentive) for this? The incentive is that using excess payments to credit payments due in the future rather than applying it to outstanding principal is more lucrative for the lender. Since it's more lucrative and there's no law against it most (all) lenders use it as the default setting." "Stop spending on the CC with the revolving balance.   After the discussion below I feel I should clarify that what I am advocating is that you make your ""prepayment"" (though I disagree with calling it that) to the existing CC.  Then, rather than spending on that card, spend somewhere else so you won't accrue any interest related to your spending.  At the end of the month, send any excess to the account that has a balance.  This question is no different than I have $X of cash, should I let it sit in a savings account or should I send it to my CC balance?  Yes, 100%, you should send this $750 to your CC balance.  Then, stop spending on that CC and move your daily spending to cash or some other place that won't accrue interest at all. The first step to paying off debt is to stop adding to the balance that accrues interest.  It's not worth the energy to determine the change in the velocity of paydown by paying more frequently when you could simply spend on a separate card that doesn't accrue any interest because you pay the entire balance every month. The reason something like this may be advisable on a HELOC but not a CC is the interest rate.  A HELOC might run you 4% or 5% while your CC is probably closer to 17%.  In one situation your monthly interest is 0.4% and in the other your monthly interest is 1.4%.  The velocity of interest accrual at CC rates is just too high to justify ever putting regular spending on top of an existing revolving balance.  Additionally, I doubt there is anyone who is advocating for anyone to charge their HELOC for daily spending.  You would move daily spending to somewhere that isn't accruing interest no matter what.  You would use a HELOC to pay down your CC debt in a lump or make a large purchase in a lump.  Your morning coffee should never be spent in a way that will accrue interest immediately, ever. Stop spending on the CC(s) that are carrying a balance. (period) Generally credit cards have a grace period before interest is charged.  As long as a balance isn't carried from one statement period to the next you maintain your grace period.  If you spend $100 in the first month you have your card, say the period is January 1 to January 31, you'll get a statement saying you owe $100 for January and payment is due by Feb 28.  If you pay your $100 statement balance before February 28 you won't pay any interest, even if you charged an additional $500 on February 15; you'll simply get your February statement indicating your statement balance is $500 and payment is due by March 31, still no interest.  BUT.  If you pay $99 for January, leaving just a single dollar to roll over, you now owe interest on your entire average daily balance.  So now you'll receive your February statement indicating $501 + interest on approximately $233.14 of average daily balance ($1 carried + $500 charged on Feb 15) due by March 31.  That $1 you let roll over just cost you $3.26 in interest ($233.14 * 0.014).  AND.  Now that balance is continuing to accrue interest in the month of March until the day you make a payment.  It typically takes two consecutive months of payment-in-full before the grace period is restored. There is no sense in continuing to spend on a CC that is carrying a balance and accruing interest even if you intend to pay all of your current month spending entirely.  You can avoid 100% of the interest related to your regular spending by simply using a different card, and no rewards will beat the interest you're charged." "Basically, your CC is (if normal) compounded monthly, based on a yearly APR. To calculate the amount of interest you'd pay on each of these accounts in a year, pull up a spreadsheet like Office Excel. Put in your current balance, then multiply it by the annual interest rate divided by 12, and add that quantity to the balance. Subtract any payment you make, and the result is your new balance. You can project this out for several months to get a good estimate of what you'll pay; in accounting or finance terms, what you're creating is an ""amortization table"". So, with a $10,000 balance, at 13.99% interest and making payments of $200/mo, the amortization table for one year's payments might look like: As you can see, $200 isn't paying down this card very quickly. In one year, you will have paid $2,400, of which $1,332.25 went straight into the bank's pockets in interest charges, reducing your balance by only $1,067.75. Up the payments to $300/mo, and in 1 year you will have paid $3,600, and only been charged $1,252.24 in interest, so you'll have reduced your balance by $2,347.76 to only $7,652.24, which further reduces interest charges down the line. You can track the differences in the Excel sheet and play ""what-ifs"" very easily to see the ramifications of spending your $5,000 in various ways. Understand that although, for instance, 13.99% may be your base interest rate, if the account has become delinquent, or you made any cash advances or balance transfers, higher or lower interest rates may be charged on a portion of the balance or the entire balance, depending on what's going on with your account; a balance transfer may get 0% interest for a year, then 19.99% interest after that if not paid off. Cash advances are ALWAYS charged at exorbitantly high rates, up to 40% APR.  Most credit card bills will include what may be called an ""effective APR"", which is a weighted average APR of all the various sub-balances of your account and the interest rates they currently have. Understand that your payment first pays off interest accrued during the past cycle, then pays down the principal on the highest-interest portion of the balance first, so if you have made a balance transfer to another card and are using that card for purchases, the only way to avoid interest on the transfer at the post-incentive rates is to pay off the ENTIRE balance in a year. The minimum payment on a credit card USED to be just the amount of accrued interest or sometimes even less; if you paid only the minimum payment, the balance would never decrease (and may increase). In the wake of the 2008 credit crisis, most banks now enforce a higher minimum payment such that you would pay off the balance in between 3 and 5 years by making only minimum payments. This isn't strictly required AFAIK, but because banks ARE required by the CARD Act to disclose the payoff period at the minimum payment (which would be ""never"" under most previous policies), the higher minimum payments give cardholders hope that as long as they make the minimum payments and don't charge any more to the card, they will get back to zero." The main risk I see to this plan is with a late payment to your credit card.  For a variety of reasons, some outside your control, you could end up with a late payment on the CC and a +18% interest rate making your arbitrage attempts unprofitable. You sense that this is risky, and it derives from placing short-term risk on a long term asset.   Your interest rate is high for the current market.  What kind of things can you do reduce that rate?  What kind of things can you do to reduce your principle?  Those kind of things represent far less risk and accomplish the same goal. "As with many questions here, while littleadv is correct, the real answer is ""each bank may handle this differently."" In my case, I was experimenting with my balance to see the impact of utilization, and I overpaid the current bill before the bill was issued.   The prior balance was paid, but then I sent a payment to bring my account to a credit balance. Further down the statement appears the line -  Your account has a credit balance. We can hold and apply this balance   against future purchases and cash advances, or refund it. If you would   like a check mailed to you in the amount of the credit balance, simply   call us and speak to a representative. You can also see that the ""revolving credit available"" is above the line of credit, implying that someone with a $5000 credit line wanting to charge a $6000 engagement ring can send a higher payment to the account and then make that charge." "First, pay off the highest interest first.  If you have 80%, pay it first.   Paying off a card/loan with a lower rate, but a lower payment or a lower balance can help your mental capacity by having fewer things to pay.  But, this should be a decision where things are similar, such as 20-25%, not 20-80%.   What about any actual loans?  Any loans with a fixed payment and a fixed amount?   If you must continue to use CC while paying them off, use the one with the lowest interest rate.   Call all of your debtors and ask for reduction in interest rate.   This is not the option to take first...  This is a strategic possibility and will cause credit score issues... If you are considering bankruptcy or not paying back some, then you have even more negotiation power.  Consider calling them all and telling them that you only have a little bit of money and would like to negotiate a settlement with them.  ""I have only a limited amount of money, and lots of debt.  I will pay back whomever gives me the best deal.""  See what they say.  They may not negotiate until you stop paying them for a few months...  It is not uncommon to get them to reduce interest (even to 0%) and/or take a reduction in the amount due - up to 25 cents on the dollar.  To do this, you might need to pay the amount all at once, so look into loans from sources like retirement, home equity, life insurance, family...   Also, cut out all expenses.  Cut them hard; cut until it hurts.  Cut out the cell phone (get a pre-paid plan and/or budget $10-20/month), cut out all things like alcohol, tobacco, firearms, lottery, tattoos, cable tv, steak, eating out. Some people would suggest that you consider pets and finding them a new home.  No games, no trips, no movies, no new clothes...  Cut out soft drinks, candy, and junk food.   Take precautions to stay healthy - don't wear shoes in the house, brush your teeth, take a multi vitamin, get exercise, eat healthy (this is not expensive, organic stuff, just regular groceries).   Consider other ways to save, like moving in with family or friends.  Having family or friends live with you and pay rent.  Analyze costs like daycare vs. job income.  Apply for assistance - there are lots of levels, and some don't rely on others, such as daycare.   Consider making more money - new job, 2nd job, overtime, new career.   Consider commute - walk, bike, take the bus.  Work 4/10's.  Telework.   Make a list of every expense and prioritize them.  Only keep things which are really necessary.   Good Luck." "I'm not sure if this answer is going to win me many friends on reddit, but here goes...  There's no good reason why they couldn't have just told him the current balance shown on their records, BUT...  **There are some good reasons why they can't quote a definitive ""payoff"" balance to instantly settle the account:**  It's very possible to charge something today, and not have it show up on Chase's records until tomorrow, or Monday, or later. There are still places that process paper credit-card transactions, or that deal with 3rd-party payment processors who reconcile transactions M-F, 9-5ish, and so on.   - Most transactions these days are authorized the instant you swipe the card, and the merchant won't process until they get authorization back from the CC company. But sometimes those authorizations come from third-party processors who don't bill Chase until later. Some of them might not process a Friday afternoon transaction until close-of-business Monday.   - Also, there are things like taxicab fares that might be collected when you exit the cab, but the record exists only in the taxi's onboard machine until they plug it into something else at the end of the shift.   - There are still some situations (outdoor flea-markets, auctions, etc) where the merchant takes a paper imprint, and doesn't actually process the payment until they physically mail it in or whatever.   - Some small businesses have information-security routines in place where only one person is allowed to process credit-card payments, but where multiple customer service reps are allowed to accept the CC info, write it down on one piece of paper, then either physically hand the paper to the person with processing rights, or deposit the paper in a locked office or mail-slot for later processing. This is obviously not an instant-update system for Chase. (Believe it or not, this system is actually considered to be *more* secure than retaining computerized records unless the business has very rigorous end-to-end info security).   So... there are a bunch of legit reasons why a CC company can't necessarily tell you this instant that you only need to pay $x and no more to close the account (although there is no good reason why they shouldn't be able to quote your current balance).   What happens when you ""close an account"" is basically that they stop accepting new charges that were *made* after your notification, but they will still accept and bill you for legit charges that you incurred before you gave them notice. So basically, they ""turn off"" the credit-card, but they can't guarantee how much you owe until the next billing cycle after this one closes:  - You notify them to ""close"" the account. They stop authorizing new charges.   - Their merchant agreements basically give the merchant a certain window to process charges. The CC company process legit charges that were made prior to ""closing"" the account.   - The CC company sends you the final statement *after* that window for any charges has expired,  - When that final statement is paid (or if it is zero), *THAT* is when the account is settled and reported to Equifax etc as ""paid"".   So it's hard to tell from your post who was being overly semantic/unreasonable. If the CC company refused to tell the current balance, they were just being dickheads. But if they refused to promise that the current balance shown is enough to instantly settle the account forever, they had legit reasons.  Hope that helps." Obviously you don't know the full extent of our company, but I'd be forgoing my salary for a year. Is that worth it to get 10%? I mean assuming it becomes a 1 Million Dollar Idea, I'd get 100k while he gets 700k, working the same amount of time. Then i'd get put on salary.