You will be able to explain when a card charges interest and why one unpaid balance makes new purchases expensive too.
Jun Hao is 27 and works in logistics in Jurong. Last December a Bangkok trip, Christmas presents and a new phone all went on his credit card. The statement came to S$2,600. He paid S$600 and meant to clear the rest over a few months. In January he kept using the card for groceries and Grab rides, as he always had. When the next statement arrived, almost every line had interest on it.
He had lost the interest-free period, and nobody had told him because it was in the terms he never read. This lesson explains how that period works on a typical card and the one decision that keeps it or loses it.
A credit card lets you spend now and pay later. Each month the bank sends a statement listing what you spent in the cycle, the total you owe and a due date some weeks later. The time between buying something and the due date for that statement is the interest-free period. On most cards, if you pay the full statement balance by the due date, you pay no interest on your purchases at all.
That is a good deal for you, and the bank still makes money on it. Merchants pay a fee every time you tap, and some of that fee reaches the bank. Many cardholders also carry a balance from time to time, and that is where interest comes in.
Paying the full statement balance means the whole amount on the statement, not the minimum payment shown beside it, and not most of it. Pay S$2,599 on a S$2,600 statement and, on many cards, you are treated as carrying a balance.
Once any part of the statement balance is unpaid after the due date, interest is charged on it. On many cards the clock for that interest starts on the date of each original transaction. So the weeks you thought were free are charged too.
Jun Hao carried S$2,000 from December. Using an example rate of 26% a year, which is only an illustration, the interest on S$2,000 for one month is S$2,000 times 26% divided by 12, about S$43. That is before counting what happens to his new spending.
This is the part that caught Jun Hao. On most cards, while an old balance remains unpaid, new purchases do not get an interest-free period. They start charging interest from the day you make them. His January groceries and rides were charged interest from the day he tapped, because S$2,000 from December was still sitting there.
The effect is that a carried balance turns your card from a free payment tool into a loan on everything you buy. People often keep spending on the card as normal while paying the old balance down slowly, and so they pay interest on far more than they realise. The free period usually returns only after you have cleared the whole balance, and sometimes only after a full cycle paid in full. Your card's terms say exactly when.
If you have to carry a balance for a while, a simple defence is to stop using that card for new spending until it is cleared. Pay for daily things from your debit card or PayNow instead, so new purchases are not charged interest from day one.
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, because a card is unsecured and you can borrow again at any time with no fixed end date.
Two other things make them more expensive than they look. Interest is usually charged monthly on a balance that already includes last month's interest, so the yearly cost is higher than the rate suggests, which you saw in How money works: banks, interest, inflation and risk, lesson 2.2, Monthly compounding beats yearly at the same stated rate. And the interest is often worked out daily from each transaction date, as above.
The rate is printed on your card's terms and on your monthly statement. It may be shown as a yearly rate, a monthly rate or both, and it may differ between purchases and cash advances. Do not rely on a figure from a forum or from this lesson. The only rate that matters is the one on your own card.
Three facts on his own card would have changed what Jun Hao did in December: the interest rate, the due date, and the rule for how interest is calculated when a balance is carried. All three are in the card's terms and conditions, and most banks print the rate and due date on each statement too. The calculation rule is usually in the terms, in a section on finance charges or interest charges, and it says whether interest runs from the transaction date and what happens to new purchases.
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.
Find the interest rate, the due date and the interest calculation rule in your card's terms or latest statement and write them down.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).