Sunday, September 11, 2016

How Credit Card Interest Works

Did you know new credit card charges start accruing interest IMMEDIATELY if you are currently carrying a balance?

I find that people often continue to use their credit cards for daily purchases (gas, groceries, etc) even when they are carrying a balance. Maybe that's because they think that at least those new purchases will have a "grace period" and not get charged interest as long as they pay at least that much on their next bill.

This is not true.

Once you start carrying a balance, If a new charge is made it will start costing you interest in a single day. That's because of how interest is calculated using the "average daily balance" method: As soon as you make a charge, the average balance for the whole month goes up a bit.

I've struggled with out to explain this in words, so if you want a specific example with numbers, I made a video to explain it:

This is why it's so important to stop using your cards if you are carrying a balance, and you often hear advice to cut up your cards or freeze them in a block of ice.

Keep on attacking that debt!