Paying the minimum payment

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Ebjdgirl923
 
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Paying the minimum payment

Postby Ebjdgirl923 » Wed Aug 17, 2016 3:31 pm

Hello, my name is Terri.
I just opened my first card, and had a quick question.


I know paying off only the minimum payment each month extends your original balance substantially. But I have a different question.

Say I used $400 of my $500 limit.
Say the minimum payment is $40.
If I make only the minimum payment two months in a row, and I decide hey, I'd like to just pay off the principal, can I do that? Or by paying their minimum payments have I signed a secret contract to owe remaining interest?

Thank you.


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Vattené
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Re: Paying the minimum payment

Postby Vattené » Fri Aug 19, 2016 12:52 pm

I recommend always paying the statement balance in full to completely avoid any interest, but to answer your question yes there will still be some interest. I believe it is called "trailing interest." You could search for that to get a better explanation of how it is calculated than what I can give off the top of my head. It should be explained in your card's terms as well.
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Kevin86475391
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Re: Paying the minimum payment

Postby Kevin86475391 » Fri Aug 19, 2016 4:48 pm

Welcome to the forum and congrats on your first card!

I'll second the advice to pay the balance shown on your statement in full every month to avoid any interest at all. It's a good policy to treat your credit cards just like cash or debit, in that if you don't have the funds in full to pay for the charge, try not to make it to begin with.

Of course that's just general advice and you know your overall situation much better than anyone else could.

Ebjdgirl923 wrote:Hello, my name is Terri.
Say I used $400 of my $500 limit.
Say the minimum payment is $40.
If I make only the minimum payment two months in a row, and I decide hey, I'd like to just pay off the principal, can I do that? Or by paying their minimum payments have I signed a secret contract to owe remaining interest?


The short answer to your question is that you can absolutely pay anything from the minimum payment to the full balance at any time. As far as how interest is charged, that's a little more complicated.

Let me see if I can give you the most details/info possible on this.

If your balance is $400 on your first statement then you won't have any interest charges on that statement, because it's your first one and you'd be within your grace period. If you then fail to pay the full $400 off by the due date specified on your first statement then you'll lose your grace period. That means all subsequent charges will begin accruing interest as soon as they are made. To re-establish your grace period you'll need to fully pay off your credit card.

Once your second statement generates you'll be charged interest for any charges from the first statement that you did not pay off. You'll then continue to pay interest every statement on all new and old charges until you fully pay off your credit card and re-establish your grace period.

However, as Vattené mentioned trailing interest can add a further wrinkle. Definitely check your credit card agreement or call the credit card company to determine how your card charges interest. However, typically it is done by determining your average daily balance for the card and then applying the APR rate your card is subject to. Thus, even if you do pay off your balance in full there is likely to be 'trailing interest' assessed because your statement likely had some days at which the balance was not $0 and was accruing interest, which in turn raises your average daily balance above $0 and thus triggers interest charges. Depending on your balances and APR, this may come out to a tiny amount, like a couple of dollars or even less than a dollar. However, many credit card companies also have a 'minimum interest charge' that they assess whenever ANY interest is due. Thus if the minimum interest charge is $5.00, then even if your interest due would normally be only $0.87, they'll still charge the full $5.00 in interest. But it all depends on your card terms and your credit card company may not do it this way.

So in your hypothetical example if you charge $400, pay the minimum for 2 months, then pay off the balance in full, then you'd be charged interest on the 2nd statement for sure (and possibly the first, but possibly not depending on whether or not your grace period is in effect. If it's your FIRST statement, then it definitely is in effect). Then on the 3rd statement you'd probably still be hit with at least some trailing interest even though the card is paid off.



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