How credit card interest and the billing cycle really work

The billing cycle in plain terms

Your card works in monthly cycles. On a fixed day, called the statement date, the bank adds up everything you spent in that cycle and produces a statement. You then get a due date, usually a couple of weeks or so later, by which the bill must be paid.

The time between the day you make a purchase and the due date for that purchase is your interest-free period. Depending on when in the cycle you buy something, it can stretch to roughly 45 to 50 days. A purchase made just after a statement date gets the longest wait; one made just before it gets the shortest.

Total amount due vs minimum amount due

Every statement shows two figures. The total amount due is everything you owe. The minimum amount due is a small fraction of it, the least you can pay to avoid a late payment fee and a negative mark on your credit report.

Paying only the minimum keeps the account in good standing, but it does not stop interest. The unpaid balance is carried forward and charged interest, and on most cards the interest-free period on your new purchases is lost as well until you clear the full balance.

How the interest is charged

Interest on unpaid card balances is calculated daily on the outstanding amount and added to your bill, and the monthly rate is usually quoted as somewhere around 3 to 3.5 percent, which works out to well over 36 percent a year. That is far higher than most loans.

Late payment fees, GST on interest and fees, and overlimit charges can be added on top. Cash withdrawn on the card is treated differently again: it typically has a fee and starts charging interest from the day you take it, with no interest-free period at all.

A simple routine that avoids interest

• Pay the total amount due, not the minimum, every month, by the due date.
• Set up auto-debit for the full amount if your bank allows it, or at least for the minimum as a safety net, and top up manually.
• Never use the card for cash withdrawals unless it is a genuine emergency.
• Keep track of the due date rather than the statement date, since they are different days and it is the due date that has a penalty.

If you cannot pay in full

If a large bill is more than you can clear at once, compare the options before you pay the minimum and let it roll. Some issuers offer to convert a big purchase into EMIs at a lower rate than the revolving interest rate, and a personal loan from a bank can be cheaper than carrying a card balance. The card payoff calculator on Truely Money shows how long a balance takes to clear and what it costs.

This is general information, not personal financial advice. Card terms differ by issuer, so read your card's current schedule of charges.