One of the first Sigma rules to follow when you get a credit card is that you should avoid paying interest whenever possible. Having said that, how many of us really check how much interest we are being charged? Also, what is our course of action when the interest is not zero?
It is quite important for you to understand how the interest is being charged and how you can manage it. Let’s explore that better here -
Situation #1 - When You Go Late on Your Credit Card Payment Due Date
Ajmal got a brand new credit card bill with 0 balance. On July 1st, he made a purchase of AED 200 using his new credit card. He needed to pay the balance in full by August 18th as July 28th was the end of the billing cycle. The plus point? He would be charged 0% interest on the bill. Or let’s just say he will get two months of loan without having to pay any extra charges.
However, due to some work, he missed the payment due date. Thus, he is charged not only a late fee but also an interest on the outstanding credit card balance. Since he was 3 days late, he had to pay 3 days’ worth of interest.
Moral of the story - When you are late in paying your balance, even if the delay is of a day, you would be charged interest. Another thing to keep in mind is that the interest is compounded every day. Simply put, you accrue interest until you pay the balance and the accrued interest in full.
Situation #2 - When You Pay Bill on Time But not in Full
Hamid was charged AED 2,000 in the previous month, but paid only AED 1,900 at the end of the billing cycle. This way, he started his new billing cycle with AED 100 balance.
Importantly, the bank charged him interest not on AED 100 but on the entire AED 2,000 because he did not pay for the due in full by the due date. The bank charged the interest on the entire amount for the total duration of the previous billing cycle until the date when he paid AED 1,900.
Once the balance dropped to AED 100, the interest was computed and charged on the new balance until the existing month’s statement closed. In this case, he had to pay AED 100 balance and the interest shown on the billing statement to get his grace period leverage back.
Situation #3 - When the Promotional 0% Interest Deal Ends
Here is a different scenario - you made purchases using the promotion 0% interest offer and purchased many items using the deal. But once the promotion period ended, you were charged a high interest for any new purchase.
To avoid this, experts advise that you should pay off your credit card balance before the promotional period ends. Moreover, you should use the card only if you can pay the balance you created in full at the end of the month or else you will be charged a hefty interest.
Pro Tip: To make the most of such offers, make sure that you read the terms and conditions carefully and keep a check on each month’s bank statement to ensure that you are not charged with any unreasonable interest.
Situation #4 - When You Transfer Balance from Another Card to the Present One
Sarah was initially using a high interest credit card. One day, she decided to transfer the balance to a card with lower interest just to save some money. However, what she did not know was that even if she transferred the balance, she would have to pay it in full to avoid carrying it any further. If she does not do it, she would not get any grace period even on the low-interest rate card.
Unlike Sarah, if you transfer your balance to a card that offers 0% interest for a limited period, keep in mind that any new purchase made on this card will be charged with a high interest rate right from the moment of purchase - regardless of whether your card is in the promotional period.
Moreover, similar to cards with zero percent interest on new purchases during an introductory period, paying late can result in losing your promotional rate and being charged interest going forward.
To make sure that you are not paying any interest, you should try to get the payment done within the grace period. For this, you can either pay off your balance in full by the end of the billing cycle or pay off the balance in small amounts multiple times throughout the billing cycle.
If, by any chance, the grace period has expired, it is recommended that you re-establish it by repaying the balance and interest.
Written By: Tanvi Pathak
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