Explainer: 7 Scenarios When You Are Charged Interest On Credit Cards

If you don’t pay your full credit card bill by the due date, the unpaid balance attracts interest charges and is carried over to the next billing cycle

While you can use your credit card to withdraw cash at an ATM, doing so is not recommended

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Credit cards are a convenient payment method that have certainly simplified our lives. The benefits they offer are numerous, but only when you use your card responsibly, especially when making repayments. As you know, credit cards levy interest charges in case of payment-related defaults, and these charges can snowball over time. So, if you haven’t cleared your credit card bill in full, or made the payment after the due date, you will be charged interest on your outstanding balance. But, these are not the only instances when interest can be charged. A crucial part of using a credit card right is understanding when and how interest is levied. This can help you avoid extra costs and stay away from unnecessary debt.

So, let’s look at the scenarios where you are likely to be charged interest on your credit card: 

1. Carrying Forward Unpaid Balance

If you don’t pay your full credit card bill by the due date, the unpaid balance attracts interest charges and is carried over to the next billing cycle. Now, credit card companies typically offer a grace period of 20-30 days for repayment of outstanding dues to help you avoid interest charges. So, if you repay your full outstanding balance within the grace period, you will not be charged any interest.

2. Credit Card Cash Withdrawals (Cash advance)

While you can use your credit card to withdraw cash at an ATM, doing so is not recommended. Interest on cash withdrawals or cash advances typically tends to be higher compared to regular transactions. Also the interest begins accruing immediately after the cash has been withdrawn, leading to a higher debt. 

3. Making Partial Or Minimum Bill Payments 

Interest is also charged on any outstanding balance that remains unpaid past the due date. This can happen if you have only made a partial or minimum payment against your outstanding bill. The unpaid amount will continue to accrue interest until it is paid off. 

4. Making Delayed Payments

As mentioned, credit card issuers offer a grace period to facilitate cardholders to repay their outstanding bills. However, if you miss the due payment date mentioned in your statement, you will be charged interest on the unpaid balance. 

5. Not Making The Minimum Payment

If you don’t make the minimum payment towards your outstanding bill, not only will you be charged interest, but may also be liable for a late payment fee. Moreover, if you fail to even make the minimum payment, you are at the risk of a higher credit card interest rate and may lose promotional interest rate offers that are often applicable on a conditional basis.  

6. Credit Card Balance Transfers

Credit card balance transfers are a helpful way to lower your debt burden but come with a cost. When you transfer your credit card balance from one card to another, the outstanding transferred amount typically attracts interest unless paid off by the due date. Many issuers offer limited-time 0% APR promotions on balance transfers to attract customers. Once the promotion period ends, a regular APR applies which can negate your debt savings.  

7. For New Purchases, If You Have An Existing Balance:

If you have outstanding balance from previous months that you are carrying over from one cycle to the next, any new purchases you make, even in the current cycle, will attract interest.

Tips To Avoid Interest Charges:

• Pay your credit card bill in full each month by the due date.
• Set reminders for bill payments if you’re managing multiple credit cards.
• Automate your bill payments by setting up auto-debits for credit card bills.
• If you can’t make the full payment, try making more than the minimum payment towards your outstanding bill. This will help lower your outstanding balance as well as your interest liability.
• Explore 0 per cent APR offers on balance transfers or new purchases to reduce your debt burden.  

A crucial part of effective money management is strategising ways to reduce your debt. With credit cards being integral to our financial lives, understanding how you can avoid interest charges will go a long way in helping you stay financially healthy. 

(The author is the Senior Manager - Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)