Credit card interest can be a mystery. It’s all explained somewhere in the fine print, and any experienced attorney should be able to figure it all out. But for the rest of us, the most important thing to know is when our credit card will start charging us interest. (See also: Everything You Didn’t Understand About Credit Card Interest, Grace Periods, and Penalty APRs)
The basics of credit card interest
Credit cards calculate your interest based on your average daily balance. At the end of each day, your account’s balance is added up, including any new charges, fees, payments, or credits. And at the end of your statement period, the average daily balance is determined by adding up each day’s balance, and dividing it by the number of days in the billing period.
This means that you will be incurring interest charges on your purchases from the date of the transaction. Just keep in mind that many transactions initially begin as “pending” and can take a few days to change to “posted.” Nevertheless, your average daily balance, and your interest charges will be based on the date the transaction occurs, not when it actually becomes “posted.”
For example, let’s assume that your credit card statement period begins on the 15th of June and ends on the 14th of July. If you were to make a $1,000 charge on the 15th of June, it might be pending for a few days before it posts. Nevertheless, the charge will appear on your account as of the 15th of June. And if you don’t make any further charges that month, your average daily balance will be $1,000. But if you make that charge at a later time, your average daily balance will be less, as will your interest charges. (See also: 7 Ways to Lower Your Credit Card Interest Rate)
The exception to the rule
Now that you see how credit card interest begins the day you make a purchase, it’s important to understand a key exception to this rule. Nearly all credit cards allow you to avoid interest charges by paying your monthly statement balance in full. Technically, interest is still being accrued, but those charges get waived when you pay your entire statement balances by the due date.
The period of time between your statement closing date and your payment due date is called a grace period. Almost all credit cards offer grace periods, with the typical length being 25 days. If a credit card offers a grace period, by law it must mail your bill at least 21 days before your payment is due.
If you fail to pay your entire statement balance in full before the due date, then you lose your grace period and will accrue interest on your average daily balance. Those charges will appear on your next statement. And once you’ve lost your grace period, then you will have to pay interest charges on your current and future transactions until you’ve paid off your entire statement balance in full again. (See also: The Best Low Interest Rate Credit Cards)
Getting a bit of extra free interest
Paying your balance in full each month is the best way to manage your credit card accounts, as you’ll pay no interest charges on your purchases. This gives you essentially a free loan from the date of your purchase until the next statement’s due date.
In fact, you can get as much free interest as possible with a simple trick. If you can delay a major purchase until after just your statement has closed, then you will get an additional month of free interest compared to a purchase made just before your statement closes. By waiting until after the statement closes, the purchase will appear on the following statement, which will have a due date a month later than the previous statement.