Credit Cards: Confusing By Design

Within the #debtfree community, there are a lot of people who have completely sworn off credit cards. On one hand, this is quite justifiable, since it seems many were somehow lead to believe that as long as you made the minimum payment at the end of each month, you could buy whatever your heart desired (so long as your credit limit allowed it) at no additional cost.

However, as many of us know, that's not the case. You must at least pay the minimum payment to avoid getting a late fee. If you pay the minimum payment, you won't have to pay a late fee, but you still have to pay interest on the balance you didn't pay.

In other words:

• Not paying the minimum payment means you have to pay a late fee and the interest on the unpaid balance. 
• Paying the minimum payment means you only pay the interest on the unpaid balance.

And at 20% interest, as most credit cards are, that interest can rack up quick. You can see people on social media sharing their stories about paying down their credit card debt which has accumulated in the tens of thousands. Granted, not all individuals may have gotten there due to lack of knowledge and and endless instant gratification. Surely, many were forced to use credit for big emergencies as well.

Fortunately, despite growing up in a non-financially-literate household, credit was one thing that we got right.


After I got my first job and bank account at 16, my debit card came with withdrawal limits. I couldn't take out more than $100 at ATMs, probably so that a thief couldn't force me to clean out my account in one transaction at gunpoint. $100 was plenty for me in those days anyway. I also had debit payment limits, and although I don't remember exactly what the limit was for those, it must have been for a few hundred dollars at the time.

Alongside the debit card, I also got a credit card. However, a credit card was not an every day carry in my wallet. That was a special card, kept at home. The only time it was used was for those big, rare purchases, that debit couldn't cover (due to the limits). Things like a TV or new video game console.

Those big purchases were planned out carefully. The only way such big purchases could be done was as follows:

1. Make sure you have enough money in your checking account for the item (this step was crucial).
2. Get the credit card from home, go to the store, buy the item, and bring the item home.
3. Go to the bank, and tell the clerk you want to pay the credit card in full from the checking account.
4. Go back home and file away the credit card.

Thankfully, a credit card was never a "card for things you can't currently afford". It was a "card for things you can afford, but can't buy, due to limits imposed on your debit card".

For years, I continued this way, but at some point, I learned about cash back credit cards: a credit card that would pay you back a certain percentage of everything you bought using that card. I was already used to ensuring my credit card was always paid in full before the due date, and I never spent enough in a given month to bring my account to zero, so getting a cash back card seemed like a no-brainer. I just had to start using my credit card all the time instead of debit, then set a monthly reminder on my phone to pay it off.

The credit card companies probably bank on people forgetting or missing a payment, which could heavily reduce (or even nullify) one's cash back returns, but with my monthly payment reminder, I wouldn't let that happen.

For years, this worked out great. Once per year, I'd get $200-$300 in cash back.

But something was wrong...

Sure, I was using my credit card for everything, but the balance always seemed higher than I'd expect. Was I really spending that much?

I began increasing my payment frequency to every two weeks.

$800 balance? OK, paid.

Two weeks later: $900 balance? Hmm. Sure, I ate out a lot in the past few weeks, but $900? Based on a glance at my recent purchases, it doesn't seem like they should add up to that amount, but, it must be right... OK, paid...

These large balances kept reoccurring, so I started scrutinizing all my credit statements for a good while. During this time, I was doing a bunch of research on credit cards, and I became unsure about various things about them. One such thing was APR. You may be well aware that your unpaid credit card is subject to 20% interest, but you may not have noticed that the credit card company calls it 20% APR, or "Annual Percentage Rate". 

Online sources say "credit card interest is assessed on a daily basis, and that credit card companies determine how much to charge you by multiplying your balance at the end of the day by your APR divided by 365". 

Does this mean if I buy a $2.00 coffee with a 20% APR credit card, and don't pay my credit card balance that same day, that my credit card balance the next day would show $2.10?

   $2.00 + [ 2(20/365) ]
= $2.00 + [ 2 x 0.05 ]
= $2.00 + $0.10
= $2.10

Just take a glance at the length of this page which describes APR. This is a lot of info, even for the inquisitive. The average person is very unlikely to look this up at all, let alone read it all and internalize it. Despite my inquisitiveness, it was just too much info even for me. 

Rather than spend any more time going deep down a financial rabbit hole of study, I decided to do the next best thing: every two weeks when I make a scheduled payment toward my credit card, I would ignore the stated balance, manually add up all my recent purchases in a calculator, and pay that amount.

Despite doing this, it was still seemingly impossible to ever see a zero balance on my credit card.

With even more research, I came to learn that this is due to a few reasons.

1. When you make a purchase, the cost shows up as "pending" on your credit card. It will remain this way until the merchant you bought from confirms/submits the purchase. The amount of days this will take varies on the merchant. 
2. When you make a payment toward your balance, it doesn't immediately reflect on your credit card balance. It takes a day or two to process. But by the time it applies and reduces your balance, some of your "pending" items have been added to the "current balance". If this were to happen, my fear was that I would be carrying a balance forward into the next month, which will cost me in interest (depending on how close the last scheduled payment of the month fell to the last day of the month).

Just look at the below screenshot. I always pay my balance in full every two weeks, and I have never seen an interest fee tacked on to my statements, yet I am seeing three different potential amounts owing...

Based on the above, since I was fairly certain the $322.89 was already paid for (despite still being shown as due 9 days ago...), so I decided to pay $355.59 (current balance + pending). A day or two later, my statement read -$124.19, meaning I overpaid my credit card by $124.19. Just... What?

And to add insult to injury, if you ever overpay your credit card, and try to pull that money back out so that you can better invest it, you'll be presented with a warning when you attempt to do so, stating it is a "cash advance transfer" that will immediately cost you $3.50....

So are credit cards confusing by design? Perhaps. After all, credit card companies are businesses, not benevolent entities. They offer a service, and they intend to make a profit.

With all this in mind, you may be thinking to yourself: "Screw the cashback. All this hassle isn't worth it. I'm going to go cut up my cards right now". Before you do that, try this new technique I came up with recently to always stay on current on payments:

1. For payments you've pre-authorized with your credit card (such as home internet, cell phone, car insurance, etc), check your past statements to determine which dates these different services are deducted. For each service, set a calendar reminder on those days, for the specific bill, and with the specific dollar amount in the reminder. Whenever notified, pay the amount shown in the notification on those days.
2. For every day purchases like gas, groceries, and weekend cafe americanos, choose to get a receipt with each of these purchases. At the end of each day, sign in to your online banking app, calculate the sum of all receipts, and pay that amount on your credit card. Once paid, discard the receipts (or keep/scan them for tax purposes, if applicable). 

By following this technique, you'll always be on top of your payments (without waiting for the merchant or the credit card company to inform you of what you owe), you won't ever have to worry about carrying a balance forward that will cost you interest, and you'll benefit from that sweet cash back from things you had to buy regardless.

Photo by Ales Nesetril on Unsplash