How credit card payments work

Credit card issuers explain their methods for calculating finance charges (interest) on the back of each statement. The most common method is "average daily balance.' To calculate this balance, the issuer totals what you owed at the end of each day in the billing period, and then divides that amount by the number of days in the period. That reveals the average amount you owed at the end of a day during that period, and determines the interest charged.

Here a comparison
By making a large purchase at the start of a billing period instead of at the end, you end up paying more in interest. You will notice how the average daily balance rises, even without new purchases, because there are more (lays with the higher balance outweighing the days with the lower balance.

Billing period. Many billing periods aren't a month long. Also, they don't always start at the beginning of a month or end at the end of a month. So you could use the card at the end of a month and have if appear at the beginning of your next billing period.

Grace period. Some issuers give you time (a grace period) from the end of the billing cycle to pay your bill (commonly 20 or 25 days). If you start the billing cycle with a $0 balance and pay in full by the due date, you'll pay no interest. The moment you carry over a balance to the next period, the issuer will immediately charge interest on every purchase.

Day 25 Payment due date. You must make at least the minimum payment by this date. If full payment arrives by now, the purchases will be interest-free.

How much goes to pay interest. This example keeps the same minimum payment for the entire payment period (for simplicity's sake). So, while not entirely accurate, it provides a sense of how much you'd pay in interest by making only minimum payments on a $1,000 credit card purchase. In this case, it would take you 43 months to repay in full and cost $360 in interest.

Month | Payment | Interest portion | Total interest | Balance owed
01 | $32 | $15 | $15 | $983
05 | 32 | 14 | 72 | 912
10 | 32 | 13 | 138 | 818
15 | 32 | 11 | 196 | 716
30 | 32 | 06 | 322 | 362
40 | 32 | 02 | 357 | 77
43 | 32 | 00 | 360 | 00

Notes:
Teaser rates. Many card offers promote low introductory rates. When the introductory period ends, the card issuer will automatically begin charging the higher interest rate on any balance you carry at the time.

Can you do better? Many experts say card issuers are often willing to negotiate the annual fee and even the finance charge, particularly for good customers.