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How I made a 100,000% credit card interest gaffe

No, no … I wasn’t charged 100,000% interest by my credit card issuer, but I did literally gasp aloud when my own gaffe – which I’ve gratuitously estimated at that crazy figure – came to my attention on my credit card statement recently.

To be clear, a credit card is a powerful tool that offers convenience, efficiency and even some financial rewards. It would be fair to say that understanding and using a card wisely are fundamental financial skills in modern commerce.

In my case, which I will go into in more detail below, it is effectively the hub of our family financial routine. But before I get into the specifics of what sunk my spirits, a little background on the mechanics of credit cards.

Converting your credit into debt
For those new to the arrangement, a credit card is not a cash machine. Rather, it allows you a certain amount of room (your credit limit) to make purchases, the value of which then accumulates as your debt.  The way most cards work, you have 21 days from your monthly statement date to pay the balance owing, and if you pay it all off then you don’t owe anything more. Sweet deal, huh?

How credit card interest is calculated
Now if you don’t pay it all off, that’s where interest comes in. You have had use of the card issuer’s money since the date of each of those purchases. Again, if you pay off the full balance, no interest applies. Once more, if you pay off the FULL balance, no interest applies. If you pay anything less, interest is charged for the month as if you had not paid off ANY of it – Check your statement for your particular interest rate.

Our household money management method
My wife and I don’t use credit cards for the credit, as strange as that sounds. Mainly, it’s the convenience of pulling purchases into one place, though we do enjoy receiving a few reward points in the process.  We have two cards on the same account for the majority of our expenses, and every day or two we transfer the amount of the purchases into a side account to accumulate a cash reserve. At month-end, that cash is ready to retire the balance, even before the statement hits our inbox as a formal notice.

100,000% interest? Seriously?!
Earlier this year, I received and paid the statement the day it landed. Unfortunately, as I learned when the next month’s statement arrived, I’d transposed two digits in the balance, thereby paying a mere(!) 99.7% of what was owed. That 0.3% shortfall multiplied by the 19.5% interest on the balance, paid on day one of the 21 I had available, works out to 115,097% -- But let’s not be ridiculous, so call it a round 100,000%.

The money moral of the story
Of course that’s crazy math, but the point is this: Make sure you understand how your credit card interest is calculated – and wear your glasses when paying the bill. Fortunately for me, my card issuer had mercy on me, crediting back the interest once I’d explained my error. Importantly, their action was based in part on my good past payment practices, which I will conscientiously continue with each future payment.

Speak to your Meridian Wealth Advisor for perspective on these important issues.