Credit Card 'Float'?

[Hammerhead]

Maybe one of you LLGs can answer a question about how credit cards work.

I'm under the impression (perhaps incorrectly) that there's a 20 or 30 day 'grace period' for most credit cards where you have a time window after receiving the invoice to pay the bill before any interest is accrued on the purchase.

Obviously, I'm asking because I'd like to get caught up by paying down as much as I can, but because I'm pretty far behind and still need cashflow, my hope is to decelerate the accrued interest by benefitting from the 'float' concept through incrementally repaying more than I charge so that the dollars "leap" to each next billing cycle.

Specifically, let's say for example you owe $5000 on your card. If you were to pay $1000 per month toward the balance, but still charge $500 per month for various living expenses, would there be a reduciton in accrued monthly interest greater than just paying $500 a month on the card alone?

Or, would there be a benefit, but only to the tune of the first month's "leap" and then it all synchronizes up.

Hope I'm making sense, here.

Thanks!

[rumballs]

All I know, which is maybe related to what you are asking, is I have at least one card where if I charge things each month and pay off the credit card each month, there is no interest.
But if I carry a balance for some number of months, then at some point pay it off, then I still have to wait a month (not use the card for a month) - otherwise I still get charged interest on the new charges that occurred after I paid it off.
Or something like that.
Regardless, it sucks

[Kneo]

The best way I can think to explain it is like this:

If you have place a charge on the card you do not pay interest on it until the next billing cycle so if you have a 0 balance on September 1st and you charge 100 dollars you will not be interest until the october billing cycle. If you pay it off before that billing cycle you will not pay interest on the 100 dollar charge. However if you only pay 50 on it you will still pay interest on the full 100. However when the Nov billing cycle comes around you will only pay interest on the 50 dollars unless you pay it off before then.

Does this make sense?

[Bear]

Let me start by saying every credit card has a different client agreement so you may want to start there.

In my experience though, the vast majority work like this:

Your purchases have a grace period of about 3 weeks (or the end of the billing cycle, whichever comes first). This means a purchase made at the beginning of the billing cycle would not accrue interest until the due date of the bill (so from the date you charge the item, to the end of the cycle and then to the payment date your purchase is interest free).

The above applies for purchases only (as opposed to payment transfers or cash advances)

It gets more complicated for accounts where a balance if brought forward from a previous billing cycle. In this case, any balance carried forward from the previous bill is subject to daily interest, but new purchases are not. What mmblz references above regarding getting a second bill is typicaly the interest that is due from the billing date to the payment date on interest bearing balances.

I know the above isn't the easiest to follow, but it's as clear as I can make it.

Bottom line is credit cards are a great tool to use when used correctly and minimize your exposure to interest costs, but they can also quickly turn into a black hole of debt so buyer/user beware.

I hope this helps & feel free to pm any questions (have worked in consumer finance for almost 10 years).

[Beagle Boy]

Many have it written as: If you carry a balance on the card, you pay interest on the average daily balance

So after you made you last payment, say on 8/29, your balance is $5000, your next cycle is 9/1-9/30. On 9/12 you charge $500. Statement should go out about 9/16, the interest calced on an average daily balance of about 5310

The grace period, generally speaking, is if you start off with a zero balance – you have to the due date to pay it off without interest accruing

[dunng]

This might help, I have not used it but seems pretty handy... http://www.vertex42.com/Calculators/...alculator.html

Edit - I guess it does not handle additional charges...

[Hammerhead]

Hmmmm...

So I get back to the dilemma. Does one pay $1000 per month and charge $500, or does one pay $500 to the card and pay the other expenses separately.

Ok, one part of me says that if the credit cards are working on an average daily balance, if you can stall as many of the new charges as possible, then it's to one's advantage. Kind of "2 steps forward, 1 step backward... then 2 forward and 3/4 step backward... then 2 forward and 1/2 backward..."

IOW, if you're charged interest on the average daily balance, and at least for a portion of the month you've reduced that average daily balance by an extra $500, does that not present an advantage?

[WyoBob]

There's one, sure fire way to "beat the system". Instead of wondering how to "game the system" (a system that is corrupt and set up for every disadvantage to the consumer that they can come up with and passed into law by "our" elected representatives), don't play.

Spend your energy and "thinking time" on getting out of credit card debt and never participate again. Pay in full every month, never using a credit card company as a bank. A young person will come out tens of thousands of dollars ahead over a lifetime.

Credit card debt is one of the biggest hurdles to accumulating wealth in this country and the credit card companies have a great lobby. The consumer will never get a fair shake. So, don't play their game, play yours. Credit cards are a poor way to learn about the magic of "compounding".

WyoBob

[Hammerhead]

Originally Posted by WyoBob

There's one, sure fire way to "beat the system"... Spend your energy and "thinking time" on getting out of credit card debt and never participate again.

Though I disagree with your characterization of credit card companies, your point is well taken. I'm not trying to 'game' the system, so much as use the same rules to my advantage. Yes, you're absolutely right that the best way to get out of debt is to not get into it in the first place. However sometimes life gets in the way, and often a line of revolving consumer credit is the first best line of defense. In my case, it was for emergency medical expenses.

Anyway, getting back to using the rules of the system, that's really all I'm after - trying to pick the best strategy to pay down the debt in the fastest, best way possible given my circumstances.

[Bear]

Originally Posted by Hammerhead

Anyway, getting back to using the rules of the system, that's really all I'm after - trying to pick the best strategy to pay down the debt in the fastest, best way possible given my circumstances.

Just wondring, but have you contacted the client services department of your credit card company to see if they could shed light on this?

[Hammerhead]

Originally Posted by Bear

Just wondring, but have you contacted the client services department of your credit card company to see if they could shed light on this?

No. My working assumption here is that the 'client services' department wouldn't necessarily be motivated to work against their employer's interests by advising customers how to pay them less.

[RedBaron]

It doesnt matter how mych you pay, as much as when you pay it. the credit card companies bill in "cycles" not "monthly". The goal is to get the over-payment in at the beginning of the cycle in order to lower the average daily balance, which is what your daily periodic rate is based upon.

If any of your balance is cash, quasi cash (lottery tickets etc), then you have no grace period, and will actually have to calculate future interest, and guesstimate when your payment will be processed inorder to achieve a zero balance.

Even if your balance is $5k and you pay $5k, dependent on when you pay it, there may (read will) be residual interest, which left unchecked can bring late fees' and interest upon those said late fees.

So the short answer is yes/no paying $1000, but spending $500 will change the average daily balance, but barely enough for you to notice the change in finance charges (under $20 differance).

I would suggest looking for a credit card offering a balance transfer special, move the money there. While paying at the lower rate look for another credit card with a balance transfer special. once money is moved close the previous credit card. Your credit score will lose a few points when card is opened, but will gain a few points back when closed, and compared to the damage your credit score takes when late payments are reported, plus the money you'll save avoiding high finance charges will result in a slim victory for you.

Or get a consolidation loan, home equity loan etc.

Hope this helps a little. Ive worked in credit cards for 10+ years now, specializing in fraud. Any questions shoot me a pm and I will do my best to answer.

[Hammerhead]

Originally Posted by RedBaron

So the short answer is yes/no paying $1000, but spending $500 will change the average daily balance, but barely enough for you to notice the change in finance charges (under $20 differance)

Wow! Thanks so much for the help. Yeah, it may be only $20, but that's four Maria Guerreros.

Appreciate the information.