Credit card debt incurs hefty interest for cash-like transactions and cash advances. Review your agreement to avoid unexpected costs.
Q: My son, who turned 19 last summer, is new to using a credit card. He’s been diligent about paying off his balance every month to avoid interest charges. However, when he showed me his latest statement, I noticed he had been charged interest. According to him, he had paid everything off in full and on time the previous month, and he insists this was the case before as well. I suggested he contact the credit card company to inquire about the charge, but he didn’t feel it was worth the hassle for just a few dollars. I would call on his behalf if I could, because it left me wondering – is it possible for credit cards to have interest charges even when the balance is paid off every month? ~Michelle
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A: Credit cards can be a valuable financial tool, offering convenience, security, and rewards for everyday purchases. However, they also come with interest and fees if not managed carefully. Understanding how credit card interest works is essential for anyone looking to make the most of their card while avoiding unnecessary fees.
We don’t normally think of it this way, but credit card interest is the cost of borrowing money from the credit card issuer. When you make a purchase with your card, you are essentially taking out a short-term loan. The credit limit assigned to your card is the most you’re allowed to spend and as you repay what you borrowed, that portion of your credit limit is restored. Credit cards are a form of revolving credit and can play a significant role in building and maintaining a credit rating.
If you pay off your credit card balance in full by the due date each month, you can usually avoid paying any interest. However, if you carry a balance from month to month, interest charges will accrue. It’s important to understand some newer conditions under which interest or fees can be incurred, as long-standing terms have evolved.
Interest free grace period
Credit card companies must provide a grace period, typically at least 21 days from the end of a billing period, during which you can pay for your previous month’s purchases without incurring interest charges. The grace period that applies to your specific credit card is outlined in the cardholder agreement. However, it only applies to purchases and not to cash advances, cash-like transactions, and balance transfers completed without a promotional incentive.
Understanding when your billing cycle ends and the duration of your interest free grace period can help you time your purchases and manage your budget more effectively, especially for expenses that need to be paid off over multiple pay periods.
What constitutes a cash advance?
A cash advance on a credit card involves withdrawing cash from your credit card. You can complete cash withdrawals in person from a teller at a bank or credit union or via an ATM. Another method of taking a cash advance is using a convenience cheque when credit card purchases aren’t accepted (such as for daycare) and for balance transfers between credit cards. Additionally, transferring money online from your credit card to a bank account or line of credit is considered a cash advance.
Cash advances are a very expensive way to borrow money. There is no interest free grace period and they typically carry a higher interest rate than regular purchases. With some credit cards, you may be charged a fee for each cash advance, and they may also have a lower cash advance limit than the spending limit for purchases. When taking a cash advance, it’s advisable to pay off as much of the balance owed as soon as possible to minimize interest charges.
What is a cash-like transaction?
If the term cash-like transaction is unfamiliar to you, you’re not alone. It’s a newer term that those of us who have been using credit cards for years might have missed in the updated terms and conditions. Cash-like credit card transactions refer to specific types of purchases that the credit card company treats like cash advances.
Each credit card issuer will define what constitutes a cash-like transaction for their cardholders, but generally, it includes using your credit card to pay for gaming (such as betting or buying chips or tokens at a casino) and purchasing lotto tickets, gift cards, money orders, or cryptocurrency. Like a cash advance, these transactions are charged a higher interest rate, and there is no interest free grace period. Additional fees may also apply to cash-like transactions.
To find out what your credit card issuer considers a cash-like transaction, contact their customer service team or review your cardholder agreement and pertinent terms and conditions.
Additional interest charges on some credit cards
There are situations where interest charges might catch you by surprise. For example, some credit card fees incur interest once they become part of the balance owing. This includes late payment fees, over limit fees, annual cardholder fees, inactive account fees, or balance protection insurance charges. If these fees are not paid off along with the full balance each month, interest can accrue on them.
Some credit cards include monthly fees and/or interest in the minimum required payment each month, but each issuer can determine the order in which they apply your payments. Additionally, many credit cards impose interest rate penalties, often around five per cent, when minimum payments are not made as agreed. This penalty is typically charged on outstanding balances for a 12-month period. If minimum payments are made as agreed during that time, the interest rate is lowered again.
The bottom line on credit card interest charges and debt
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