When does interest begin accruing on charges?

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I'm looking for a good student credit card, as this will be the first one I will have. I'm just stuck on one thing. Are there any cards that don't build interest if it's paid in full and on time each month? If I haven't used it, will it still require a payment because of interest? I hope this makes sense. -- Kaelea

Answer Dear Kaelea,
You ask what many other people would like to know, which is how credit card issuers apply interest charges. Even better, you've done it before getting an account. Now you'll have the information you need to avoid common mistakes.

So here is what happens regarding a credit card's applied interest:

  • A lender issues you a credit card with a specific interest rate. On the application you will see the interest rate expressed in annual terms, with the annual percentage rate usually referred to by the acronym APR. The lower that number is, the less you'll be charged on a debt that you carry over from month to month. APRs typically range from 10 percent (for those with excellent credit histories) to well over 25 percent. As a newbie, you'll probably be offered a higher APR card, at least initially. 
  • As you charge, the issuer tracks spending. Each time you make a purchase, you're borrowing the money from the credit card issuer. It will issue statements that show where you shopped and indicate a running total of the amount you owe. You should read these statements to make sure all the information is accurate -- and to keep track of your debt.

After that, the situation branches off. If you:

  • Pay the entire balance due, no finance fees are added! The APR could be in the triple digits but you'd never have to pay more than what you spent if you pay the entire sum by the due date. Federal law requires the interest-free grace period to be at least 21 days. Manage your account this way and you will build a positive credit history while enjoying the safety and convenience of a credit card at no cost to you! And no, the issuer will not expect a payment (or add fees) unless you use the card again. 
  • Pay less than the balance, finance fees are applied. Of course, credit cards also come with a rollover feature. As long as you send the minimum requested payment, you're adhering to the terms of the contract. However, interest will be added to the remaining balance, and it compounds -- meaning that if you carry it over longer than one month, interest will be charged on everything you owe -- on the original unpaid amount, on the previous month's interest and on whatever new purchases have been made. For this reason it's best to pay in full. Occasionally, though, you may want to pay for something incrementally. As long as you delete the debt in a few months, the extra cost might not be too bad.

For example, let's say you buy a new laptop with your credit card for $1,200 with a 21 percent APR card and pay it off in six months. With payments of about $212, the total interest charges would be about $75. Not a bad deal! However, if you send just the minimum payments (about $36 in the beginning), it would take you more than six years and cost you $940 or so in interest. Very bad indeed! 

When you get the credit card you want, stick to the "pay in full" method until you're comfortable using it. Make sure you get those payments in on time, too, as it will help increase your credit scores quickly.

If all this sounds simple and too good to be true (free short-term loans? Sweet!), be aware that it's also absurdly easy to overspend with plastic. Keep careful track of your running balance and stop charging when you've reached your personal maximum, not the creditor's.

See related: 10 worst credit card mistakes, 8 things you must know about credit card debt

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Updated: 02-22-2019