Explain when a card charges interest, and why one unpaid balance means new purchases are charged interest too.
Jun Hao is 27 and works in logistics in Jurong. Last December he put a Bangkok trip, Christmas presents and a new phone on his credit card, and the statement came to S$2,600 (an example figure, like the others here). He paid S$600 and planned to clear the rest over a few months. In January he kept using the card for groceries and Grab rides as usual, and his next statement showed interest on almost every line. He had lost the interest-free period. The rule that explained it was in terms he had never read, and nobody had told him about it.
A credit card lets you spend now and pay later. Each month the bank sends you a statement listing what you spent in that cycle, the total you owe, and a due date some weeks later.
The interest-free period is the time between buying something and the due date of the statement it appears on. On most cards, if you pay the full statement balance by the due date, you pay no interest on your purchases at all.
The bank still makes money from people who pay in full. Merchants pay a fee every time you tap your card, and part of that fee reaches the bank. The bank also earns interest from the many cardholders who carry a balance from time to time.
Keeping the interest-free period comes down to one decision each month: pay the full statement balance by the due date.
The full statement balance is the whole amount on the statement. It is not the minimum payment printed beside it, and it is not most of the amount. On many cards, paying S$2,599 on a S$2,600 statement counts as carrying a balance, with the same result as paying far less.
Carrying a balance means leaving any part of the statement balance unpaid after the due date. Once you do, interest is charged on the unpaid part. On many cards, that interest runs from the date of each original transaction, so the weeks you assumed were free are charged as well.
New spending is affected too. On most cards, while an old balance remains unpaid, new purchases get no interest-free period and are charged interest from the day you make them. The card stops being a free way to pay and becomes a loan on everything you buy with it.
This is what happened to Jun Hao. He carried S$2,000 from December (S$2,600 minus the S$600 he paid). Using 26% a year as an illustration only, and not a real rate to rely on, one month's interest on that S$2,000 is S$2,000 times 26% divided by 12, which is about S$43. That is before counting any interest on new spending. Because the December balance was still unpaid, his January groceries and Grab rides were charged interest from the day of each tap.
Many people do what Jun Hao did: they keep spending on the card as normal while paying the old balance down slowly, so they pay interest on far more than they realise.
The interest-free period usually comes back only after you clear the whole balance. On some cards it returns only after a full cycle paid in full. Your card's terms state exactly which applies.
If you have to carry a balance for a while, stop using that card for new spending until the balance is cleared. Pay your daily expenses by debit card or PayNow instead, so new purchases are not charged interest from day one. Then check your card's terms to see when the interest-free period returns.
Card interest rates are among the highest of any consumer credit you are likely to use. They are much higher than typical rates on personal instalment loans, car loans or home loans. One reason is that the card is unsecured: nothing backs the debt. Another is that you can borrow again at any time, with no fixed end date.
The way interest is charged adds to the cost. It is usually charged monthly on a balance that already includes last month's interest, so the yearly cost is higher than the stated rate suggests. You saw how this works in the course "How money works: banks, interest, inflation and risk", lesson 2.2, "Monthly compounding beats yearly at the same stated rate". Once you carry a balance, card interest is also calculated daily, from the date of each transaction until the bank receives full payment. Your bank's terms on finance charges set out exactly how this works on your card.
Three facts on Jun Hao's card would have changed his decision in December: the interest rate, the due date, and the rule for how interest is calculated on a carried balance. All three are in the card's terms and conditions, and most banks also print the rate and the due date on each statement.
The interest rate is printed in the terms and on the monthly statement. It may be shown as a yearly rate, a monthly rate, or both. Don't rely on a rate you read on a forum or the 26% used in the example above. The only rate that matters is the one on your own card.
The calculation rule is usually in the terms, in a section on finance charges or interest charges. It says whether interest runs from the transaction date and what happens to new purchases while you carry a balance.
To check your own card:
Open your latest statement. Open the card's terms and conditions on the bank's website. Find the interest rate, and note whether it is yearly, monthly or both. Find the due date. Find the interest calculation rule in the finance charges or interest charges section: whether interest runs from the transaction date, and what happens to new purchases while a balance is carried.
Your own card has the same three facts written down somewhere. Open your latest statement and the card's terms on the bank's website, and find each one.
Look up the interest rate, the due date and the rule for calculating interest in your card's terms or latest statement. Write all three down.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).