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No interest-free period on credit cards with unpaid balances

Not understanding the billing process in credit cards, is a widespread problem. Consequently, many users not only 
(a) lose the benefit of free credit period, but also 
(b) end-up with enormous interest costs.

Therefore, it is in our best interest, to know how credit card companies bill us for our purchases, and levy interest on the same.

Suppose, you are billed for the usage of your credit card between '15th of Month 1' and '14th of Month 2'. The bill is generated and sent to you on 17-18th of Month 2 and the payment due date is 3rd of Month 3.

Now, assume you made a purchase of Rs.10,000 with your credit card on Mar 15; with no further transactions till Apr 14.

Then, you would be billed for Rs.10,000, for the period 'Mar 15 - Apr 14'. And the due date, for the making the payment, would be May 3rd.

Now let us evaluate the various scenarios:

Scenario 1: Payment made before the due date
When you clear the "entire" payment prior to the due date, you have to pay only Rs.10,000 and your liability with the credit card company ends.

As you will observe, if you use your credit card on Mar 15 and pay the amount due on May 3, you enjoy around 49 days of free money. Alternatively, if the card is used on Apr 14 and the payment made on May 3, you get free money for 19 days.

In other words, you don't pay even a single rupee as interest for borrowing money for this 19-49 days (actual no. of days may slightly vary depending on the card that you use). This, in normal parlance, is called the "interest-free credit period".

Important! You get the benefit of interest free credit ONLY IF you pay off the ENTIRE amount before the due date.

No person, in his right senses, should ever have unpaid credit card bills.
Scenario 2: Amount is carried forward to the next month
Say, you are running short of cash. In such a case, you can carry forward the outstanding balance of Rs.10,000 to the next month. Now, of course, you would have to pay a cost for enjoying this credit... it would no longer be free.

[Note: There is a minimum amount due payable... typically around 5% only of the total amount due. However, to keep things simple, I am ignoring the same here. By the way, don't miss my blog post Minimum Amount Due means Maximum Financial Destruction.]

In the meantime, you make another purchase on your credit card for Rs.5000 on May 5th.

Then, on May 10th you pay Rs.15,000, equal to the amount of purchases you have made.

After May 14th, the credit card company will generate the bill for the period Apr 15 - May 14. Given that you have already paid the purchase amounts i.e. Rs.15,000, nothing more is due from you...EXCEPT THE INTEREST COST.

And this is where I demand your COMPLETE ATTENTION:

The normal understanding is that
a) Since Rs.5000 was spent and paid within the same billing cycle, and much before the normal due date, there is no interest cost on the same.
b) The interest payable on Rs.10,000 carried forward would be for 7 days only (from the due date i.e. May 3rd till the payment date i.e. May 10th.)

On both counts you would be WRONG:

The terms and conditions stipulate that
a) The interest on the outstanding balance carried forward would apply from the date of purchase i.e. Mar 15th. In other words, your interest liability would be for 56 days!
b) As long as there is an outstanding balance on your credit card, the free credit period will not be available on the fresh purchases. Thus, on the Rs.5000 purchase, you would be liable to pay interest for 5 days.  

In short, if your credit card bills are not paid on or before the due date, you lose the benefit of interest-free credit period — both on the carried forward amount and also on all the fresh purchases. Accordingly, all interest charges are payable from the original date of purchase.

Scenario 3: You don't make the Rs.15,000 payment as assumed in Scenario 2
Apart from paying interest cost on all the purchases, from their respective due dates, you will have to pay interest on interest too. In other words, the interest costs get compounded month after month.

Concluding, not paying the credit card bill before the due date and carrying forward the outstanding balance, is as good as committing financial suicide. Your precious finances will experience not one, but many grievous injuries...
... the basic interest cost is usurious 30-50% p.a.
... plus there is a 14% service tax on this interest charge
... you lose all benefits of free credit period on the outstanding amount
... no further interest free credit period is allowed on any fresh purchase
... there is an interest on interest payable too
... it spoils your Credit Score, which would jack up the costs of all your future borrowings, including home loan, education loan, car loan etc. 

Therefore, no person in his right senses should ever have unpaid credit card bills.

But suppose, despite all your efforts, you do end up with outstanding bills:

Then, first and foremost, put a complete stop to using that card. Else, with every new purchase, you will only keep adding more and more to your ballooning interest burden. 

Secondly, do everything within your means to ensure that the credit card bills don't remain pending for long.

It is a grave emergency and you can't afford to be complacent about it. Besides, credit cards are responsible for global warming.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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