Do Credit Cards Charge Interest on New Purchases If One Is Paying Off a Balance?

If a person has $10,000 balance on a credit card, is there any difference between A. If they have budgeted $1000 for spending and spent $1000 to put it on a debt card and use an extra $500 to pay down the credit card or B. If they just put the current month’s $1,000 spending on the card and at the end of the month paid $1,500.

Does using it properly while a card has a balance make them incur more interest charges or the same as just making the $500 payment?

When credit cards carry a (any) balance they charge interest on the entire amount, even purchases, on a daily basis. So there is a difference, because the client in scenario B would accrue interest daily on the purchases they made that month, while in scenario A they are only accruing interest on the existing balance.

The math isn't massive, but it is significant. Assuming they made the purchases on the 1st of the month, paid the bill on the 30th, and had 30% interest, the interest on the $1,000 of purchases on the credit card would be about $25. The question then becomes will using Scenario B be more likely to have the person stay on track in paying off the credit card balance. If so, it's likely worth the $25 a month.

Each new month will not get it's own grace period if there is a balance that has carried over from the previous month (even a $0.01 balance). Grace periods apply to purchases made when no balance was rolled over to the next month.

While this isn't true of ALL cards (because card policies are written by the financial institution who issued the card) I have yet to see a card policy where this isn't the case, and I used to be a C-level executive for a credit union so I have talked with a lot of card issuing banks/credit unions and consultants. 

There was one which offered a promotional period with a 0% interest rate on the purchases made even when a balance rolled over from a balance transfer from another credit card. But even in this case, they said interest would accrue from the date of purchase if a balance carried over from the previous month. They just set the interest at 0%.

What you'll want to look for in the card policy is the phrase (or a similar phrase) "interest will accrue from the date of purchase." The surrounding sentences will likely explain the details of the interest charges on new purchases.

Joshua Escalante Troesh is the President of Purposeful Strategic Partners and a tenured professor of Business at El Camino College. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

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