What Does Purchase Interest Charge Mean?
In most cases, if you miss the due date for your credit card payment, you will be charged interest on the amount outstanding.
Interest is charged to you in the form of a charge called a “purchase interest charge”.
This is essentially a late fee that corresponds to the interest rate of your credit card.
For example, if you owe your credit card company $1,000 at the end of the billing cycle and your interest rate is 20%, you will be charged $200 in purchase interest.
The term “purchase interest charge” is the name coined by banks to refer to this interest amount.
How does Credit Card Interest Work?
Credit card companies make money from consumer credit cards in a few ways.
The main ones are flat fees and interest from cash advances and overdue payments.
Sometimes, a credit card comes with an opening grace period during which you won’t incur interest.
But after that, you need to pay your credit card bill on time and in full to avoid interest charges.
How To Avoid Interest Charges
The only ways to avoid interest charges are to make sure you pay any outstanding balances on time.
That means a large part of avoiding interest charges is not incurring more debt than you can afford to pay back by the due date.
Interest charges can rack up and grow out of control quickly.
In Canada, interest charges can range up to 23% annually! That means that a $1,000 debt may balloon up to $1,230 by the end of the year.
That’s why it’s in your best interest to pay off the entirety of your credit card debt outstanding before the end of the billing cycle.
Sometimes, it’s hard to pay back what you owe in one billing cycle.
If you owe thousands of dollars on one statement and can’t afford to pay it back, it’s critical to come up with a budget and get it under control as soon as possible.
Save a minimum amount each month to put towards your credit card bill, and ensure that you incur minimal incremental debt on the card thereafter.
If you’re not careful, purchase interest charges can become a major addition to your regular expenditures.
Paying Your Balance
Ideally, you will completely pay off your statement balance at the end of each billing cycle.
In that case, you won’t suffer from purchase interest charges.
Sometimes, however, it’s unavoidable.
If you can’t afford full payments, start budgeting to pay off as much as you reasonably can.
At the very least, you want to pay your monthly minimum (usually found at the bottom of your credit card statement).
Credit card payments are normally made manually.
When you’re paying, there are three balances you need to pay attention to:
Minimum
The minimum payment on your statement is normally a fraction of the total bill.
If you repeatedly fail to pay the minimum, you will eventually default on the account.
This normally leads to your creditor closing your account and your debt going to a collections agency.
Statement Balance
This is the balance that is due for the current term.
You must pay the statement balance off in full to not incur any interest.
Any outstanding (unpaid) amount on your statement balance will be charged to you in purchase interest.
For example, if your statement balance is $1,000 and you pay back $800, you will have to pay a purchase interest charge for the remaining $200.
If your interest rate is 20% for instance, that translates to a $40 charge.
Current Balance
This is the current debt on your credit card.
It includes the entirety of your statement balance, plus any new debt that will roll over to next month’s billing cycle, giving you a real-time view of what you owe cumulatively at a certain point of time.
You don’t need to pay your current balance off by the due date.
Interest is only charged on the unpaid amount of your statement balance.
Avoid Cash Advances
You can use a credit card to withdraw money directly through an ATM.
Or, you can use your credit card to transfer money to a debit card online.
This way of borrowing money from your credit card (getting a cash advance) is far more expensive than using a credit card to make a purchase.
Cash advances of all types normally carry very high interest rates.
Credit card cash advances are no different.
If you’re already struggling with debt, that’s all the more reason to avoid taking them whenever possible.
Cash advances normally come with a flat fee as well, and overall, they are one of the most expensive loan products on the market.
