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Can you pay off your credit card bill in full and still be charged interest? Yes – depending on the timing of your payment.
As National Financial Educators Founder and Chief Education Officer Adam Carroll points out, “One of the greatest expenses we have in our life is the interest expense on debt.” Interest charges accrue according to the terms and conditions legalese of your particular credit card, which people rarely read until it’s too late. Generally, when the billing cycle ends, you will have a grace period to pay off that balance in full and avoid interest charges.
Your credit card statement will show the statement closing date, the amount due at that time, and the payment due date on that amount. Assuming your card has a grace period – and not all do – the difference in the closing date and the due date is the grace period. Any grace period offered must be at least 21 days per the 2009 CARD Act.
If you never carry a balance, it’s straightforward. There are no interest charges. The only exceptions are if your credit card doesn’t allow a grace period on certain transactions, like cash advances.
When you carry a balance, things change. Usually, the grace period no longer applies and interest on purchases is charged from the time the purchase registers on your account.
For example, let’s say you make a $300 purchase on June 1 and your billing cycle ends June 15. Your statement has a due date of July 6. You have a 21-day grace period to make this $300 payment (and any other purchases during the statement period) with no interest charges.
Now let’s add a $200 balance carried over from the previous month. You pay off the $300 purchase on July 2, without addressing the $200 balance. Your next bill will include finance charges on $500 ($200 balance plus $300 purchase) from June 1 to July 2 and interest charges on the unpaid $200 balance from July 2 to July 6. The same principle applies to all other purchases made during the May 15 to June 15 billing cycle.
To completely clear your account, you would have to not use the card for a month and pay off the remaining interest charges during that billing cycle – or you can make an estimated overpayment to cover the finance charges. (Unless you have an accounting degree and way too much time, it’s virtually impossible to calculate exactly how much to overpay.)
If you pay more than your finance charges, you can keep it as a credit on future purchases or ask your card issuer for a refund if you’ve significantly overpaid.
Before overpaying your bill, consider the drawbacks. You’ll have a zero balance – but that won’t help your credit score much over paying off the residual charges in the next month. You’ve also lost any interest you could be earning on the overpayment. Could you save more by applying your overpayment to other bills?
If you plan to overpay, contact your credit issuer to see if overpayment is allowed and if there’s a limit. Large overpayments raise a red flag – your card issuer may suspect an identity thief has hijacked your account and is preparing for a fraudulent refund request. Your account could be locked down, forcing you to call your card issuer to rectify the situation. If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, join MoneyTips.
You may be able to overpay your bill, but it’s better to prevent interest charges in the first place. As National Financial Educators Founder and Chief Education Officer Adam Carroll points out, “One of the greatest expenses we have in our life is the interest expense on debt.” Construct a budget that keeps charges below what you can pay each month, leaving a surplus for emergencies. You’ll keep interest and finance charges as low as possible while having a positive impact on your credit score.
If you want more credit, check out our list of credit card offers.