How do credit card companies decide the amount of principal to charge interest on the revolving account?

Question

EDIT: This question is not a duplicate of When to pay a credit card in order to avoid fees/penalties/interest? as that question asks how to avoid interest, as to where I am asking which amount of principle is subject to interest.

Since it's a revolving account, I get a little confused. Some examples:

I receive a statement: Balance of $500 on my card. I pay off in full, before the due date. Then I accrue another $500 before the due date. Come due date, am I charged interest?

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue another $200 before the due date. Come the due date, am I charged interest on the full $500? $300? Other?

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue $300 more. At due date, what portion of the $600 is subject to interest?

Answer 1

I receive a statement: Balance of $500 on my card. I pay off in full, before the due date. Then I accrue another $500 before the due date. Come due date, am I charged interest?

So your statement is payed off in full, the next $500 are due on the next due date. "This" due date is free of interest.

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue another $200 before the due date. Come the due date, am I charged interest on the full $500? $300? Other?

Of your $500 which were due, $300 are remaining and bear interest.

But: It depends on the conditions of your card whether the "new" $200 bear interest or not. Often, if you carry a balance, there is no grace period.

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue $300 more. At due date, what portion of the $600 is subject to interest?

This is more or less the same situation, but with $300 instead of $200: at due date, you have $300 "old debt" which definitely start accruing interest and $300 "new" debt which might accrue interest due to your balance not even. But again, this might vary on the conditions of your card.

Answer 2

It helps to pick some numbers.

Suppose your billing periods are all from the 10th of each month to the 9th of the next month (e.g. 10th August to 9th September).

Between 10th August and 9th September, you can pay into the account as many times as you like, and you can withdraw from the account as many times as you like (subject to credit limits, etc). Say you started with a clean slate on 10th August, and over period from 10th August to 9th September deposited a total of $500 and withdrew a total of $600.

The bank works out the balance on 9th September:

• starting $0 - amount paid in $500 + credit drawn $600 = net $100 credit used

You now owe the bank $100. This is the principal on which interest would be calculated, subject to interest-free periods, late-payment penalties etc.

In your examples:

I receive a statement: Balance of $500 on my card. I pay off in full, before the due date. Then I accrue another $500 before the due date. Come due date, am I charged interest?

• start $500 - paid in $500 + credit drawn $0 = $0

Principal = $0, so there's no interest expected to be paid.

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue another $200 before the due date. Come the due date, am I charged interest on the full $500? $300? Other?

• start $500 - paid in $200 + credit drawn $200 = $500

Principal = $500, so expect to pay interest on $500. Now, there are probably rules about interest-free periods that take into account the dates of individual transactions, so it's not just a straightforward 'interest rate x principal' calculation. The start $500 - paid in $200 amount ($300) is likely to be accruing interest all the way; the credit drawn $200 might also be accruing interest because you didn't pay in full the previous month. And if you didn't pay in time the month before that, there might be yet more charges.

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue $300 more. At due date, what portion of the $600 is subject to interest?

• start $500 - paid in $200 + credit drawn $300 = $600

Principal = $600, with comments along the same lines as the $500 principal example above.

Answer 3

These answers assume that you are not carrying a balance

I am also assuming that the statement closed on 15 September, and that the payment is due on the 10th of October.

I receive a statement: Balance of $500 on my card. I pay off in full, before the due date. Then I accrue another $500 before the due date. Come due date, am I charged interest?

If you pay the $500 on or before the due date (October 10th) you will owe no interest. The new charges will show up on the bill that closes on October 15th. That new bill will also show all the payments you made between September 16th and October 15th.

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue another $200 before the due date. Come the due date, am I charged interest on the full $500? $300? Other?

When making a partial payment you will have to make sure that you make at least the minimum payment, that number is reflected on your billing statement. If you fail to make this minimum payment the credit card company will hit you with a penalty. Since you made the minimum payment you escaped that penalty.

The statement that closes on 15 October will show that you are now carrying a balance. Interest is now accruing on the $300 balance and the new $200 in charges. By not paying off the entire balance, you lost the grace period.

I receive a statement: Balance of $500 on my card. I pay off $200, then accrue $300 more. At due date, what portion of the $600 is subject to interest?

This is a similar situation. The bill of 15 October will reflect that you are carrying over $300 which they are charging interest on, and they are also charging interest on the $300 in new charges.

If you always pay the amount shown on the statement by the due date, you will never have to pay interest. But if you either miss payment, or only make a partial payment not only will you be charged interest, but the new purchases immediately accrue interest. In many cases it can take two billing cycles of full payments before you can stop the accruing of interest.