Credit cards can be a great convenience when you can't afford to pay for some of your purchases all at once. But although a credit card can buy you some time, you can't stop making payments entirely. If you're asking yourself, "How do credit card payments work?" take some time to understand your card's grace period, minimum payment requirements and how your payments are ordered.
The Grace Period
A grace period is the amount of time you have before you must begin paying interest on your debt. You typically have about 25 days to pay off your charges after you receive your statement, but interest charges will begin to accrue if you don't make a payment within that timeframe. Rates can range from 15 to 25 percent or even more for most credit cards. Understanding when your grace period ends is an important step in becoming a responsible credit user.
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The Minimum Payment
You aren't immediately liable for your entire balance when your grace period ends. Your credit card company will require a minimum payment from you, which usually ranges from 1 to 3 percent of your outstanding balance. For example, if you have $10,000 in credit card debt, your minimum payment will likely be between $100 and $300. If you don't make your minimum payment on time, you'll probably face a late fee of about $25 to $35. Your credit card company can also report your late payment to the credit reporting agencies, which will likely have an adverse effect on your score.
Order of Application
Different portions of your outstanding debt may carry different interest rates. This can happen if you make a zero percent balance transfer, for example. The amount you transferred will carry a zero percent interest rate while any regular purchases you make will carry the standard rate. In the past, credit card companies could apply your monthly payments to the zero percent balance first. This made it more difficult to pay off the high-interest portion of your debt. Thanks to legislation that took effect in 2010, credit card issuers must now apply payments to the highest-rate debt first.
• NOLO: What Is a Credit Card Grace Period? http://www.nolo.com/legal-encyclopedia/what-credit-card-grace-period.html
• Nerdwallet.com: How Does My Credit Card Issuer Come Up With My Minimum Payment? https://www.nerdwallet.com/blog/credit-cards/credit-card-issuer-minimum-payment/
• CreditCards.com: New Law Bans Payment Card Allocation Trickery http://www.creditcards.com/credit-card-news/law-bans-credit-card-payment-allocation-trickery-1282.php