Suppose you transfer $1000 from your old credit card to new one. The new card says 0% interest rate for the first 12 months, then 5% thereafter. It also says 10% rate on new purchases. In the first month of owning the new card, you make $50 worth of purchases. When the statement comes, you see a minimum of $27 for payment. You make a payment of $50 - covering your purchase for the month. You reason that this $50 will cover your purchase - so you will pay no interest on this. As for balance transfer, it's still within the 0% offer period. Cool!
Next month when you get your statement, you see interest charges. What??????? Did they cheat you?
No - not really. It's all in the fine print. Here's how it works.
When you transferred $1000 to your new card, you have borrowed $1000 for 0% for 12 months, and then 5% thereafter. When you make a purchase, you have borrowed $50 at 10%. So there are two pots of money with two different interest payment rules. (In general, you may have many more pots each with different amounts and rates as the bank may offer special rates during holidays, etc. etc.). So when you make your $50 payment, the question the bank has to answer is: "Which pot do I apply this payment to?"
Banks being banks use the "lowest interest pot first" rule. They will apply the monthly payment you make first to the lowest interest rate pot. If monies are left, they will apply it to the next higher interest pot, and so on.
So in this example, your $50 goes towards the lowest interest pot - which is $1000 at 0%. So, the balance in this pot becomes $950. There is no more money in your monthly payment left. So your pot of $50 at 10% remains unpaid in the first month and accrues interest.
(Notice that this behavior by the banks is EXACTLY the opposite of how you and I would pay down loans. We would choose the highest interest pot and pay it down first, and then the next highest, and so on. Our motivation is to pay as little as possible. Banks want to soak us for as much interest as possible.)
When you transfer balances, remember this "lowest interest pot gets paid first" rule.... So if you balance transfers, DO NOT make new purchases on this card UNTIL you have cleared off the entire balance transferred....
The best rule of thumb, of course, is "Neither a Borrower Nor a Lender Be" (to quote Shakespeare) - use the card for its convenience, points, miles, etc. - but don't fall for interest payment traps that lurk in there.
Submitted November 08, 2017 at 06:54AM by arnexa http://ift.tt/2hk1VlM
