I often find myself answering this question. I recently found myself in the middle of a debate and conversation with my own credit card company regarding an interest charge. It was only $13.00 but I wanted to get to the bottom of this huge misunderstanding and regular debate as a public service to my clients.

The following is an explanation and example courtesy of my Citibank card services representative.

When you agree to accept a credit card, you agree that you will pay back the amount they are lending you for that month. [or “billing cycle”] in full or pay interest on the full amount regardless of how much you paid [down or off]. You will continue to pay that interest until that amount is paid. If you use the card in the meantime, say next month [billing cycle] that too will be added and usually to the end. Therefore, you will not be able to pay that amount until you pay the old amount.

Example: January has a credit card with a limit of $2000 and an interest rate of 22%. You load $2,000 on that card during January. The bill comes at the end of the month and you pay $1,000 of that bill. February will pay 22% of the total $2,000 because he said he would. You also agreed that you would pay 22% until that original amount is paid. If you didn’t use the card and paid the final $1,000 when your February statement arrived, you would be paying the $1,000 plus 22% interest on the $2,000. If during March if you still haven’t loaded more on the card, you would potentially have the interest of the $1,000 at 22% interest and that’s it.

What about balance transfers?

Tragically, most people don’t know this, nor do they understand that by charging more on this card, the problem continues to compound and snowball. Therefore, the statement often comes up: “I should be fine because I changed mine to a ‘0%’ card for 1 year [or some other specific term]. That’s fine, however there are two additional traps that can [and do] significantly changes this ideal temporary recovery window. First, you may have to pay a fee, usually a percentage of the transferred balance. If it is a large balance, this will equate to a large amount. Second, if you use this [new 0%] After you’ve transferred debt from another card, you’ll need to pay off the transferred balance before you start paying any new charges you’ve added that are accruing at the card’s assessed rate after the “one year” period. zero interest period ends.

The following example is courtesy of one of my clients.

Example: Customer transferred $20,000 from a high interest credit card to a zero interest credit card over 12 months. He was short on cash one night and strictly for convenience he used this [new card] for the $70.00 dinner bill. After speaking with the card services representative. she was informed of the following. In the agreement you signed for this [new] card, you agreed that the balance transfer amount would be assessed at 0% interest. However, if you use this card, the charges will “hunt to the bottom” or pile up behind the $20,000 to pay, so to speak. That is, the $20,000 carries 0% interest, but the $70 you were unable to pay until the $20,000 is paid off, accumulates at 29% and will continue to do so until the initial $20,000 is paid off in full. Only after this initial transfer was paid could the customer pay the $70 plus interest at that time.

NOTE: “Billing Cycle [which is yet another way you can get hung up but we’ll address at another time].