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In this answer, RonJohn describes a method of paying off credit card debt in such a way that large balances can be carried over from month to month without incurring interest. I don't follow the argument in the answer, and the comment thread is now far diverged from the original question, so it seemed appropriate to ask another.

The numbers in this spreadsheet don't make sense to me.

Spreadsheet showing charges and payments

If I charge $3,500 and pre-pay $1,900 in January, I would expect my January bill to show that I had to pay $1,600 ($3500 - $1900) on or before February 21st to avoid paying interest.

Rupert Morrish
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  • You've got to also buy a sufficient amount of other stuff in January; pay that off in addition to a sufficient portion of the large purchase. The formulas in that spreadsheet are just a running balance of purchases and payments. – RonJohn Feb 27 '20 at 19:34
  • It won't work if the large purchase is too large of a multiple of your normal purchases, and it won't work if you take "too long" to pay off the big purchase. – RonJohn Feb 27 '20 at 19:36
  • @RonJohn can you please address the specific point in the question - that the January credit card bill will be $1,600, and that has to be paid by Feb 21st? – Rupert Morrish Feb 27 '20 at 19:43
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    I share your confusion, with my credit card, in this scenario, I would be paying interest starting February 21st because the January balance has not been paid in full. My bill would show that $1600 need to be paid by Feb. 21st, but only $550 were paid (the Feb. 14 payment). – JBGreen Feb 27 '20 at 19:44
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    @RonJohn Also, is your $1100 of “All January” spending all done before the January statement date, or is some of that after the January statement date? – Ben Miller Feb 27 '20 at 19:51
  • "the January credit card bill will be $1,600, and that has to be paid by Feb 21st". The bill generated in early February certainly will say "you owe $1600". That doesn't matter, though. What matters is the FIFO nature of how the bank applies payments, and when you make the payments. – RonJohn Feb 27 '20 at 19:54
  • I know this works, because I've done it with my Chase CC. – RonJohn Feb 27 '20 at 19:55
  • @BenMiller-ReinstateMonica yes, it's the sum of the various and sundry charges you make all month. – RonJohn Feb 27 '20 at 19:56
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    So you got a bill for $1,600, you paid $550, and Chase didn't charge you interest? I don't think this is going to be good advice for most people. – Rupert Morrish Feb 27 '20 at 20:05
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    @ronjohn Sounds like you have a great credit card. Mine certainly starts charging me interest on all purchases as soon as I miss a balance payment. It happened once because of an auto-pay fuckup. Googling a bit suggests most credit cards work like mine. – JBGreen Feb 27 '20 at 20:09
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    @RonJohn Am I correct in assuming that your 1/15 payment was made before the statement date and the 1/31 payment was made after? – Ben Miller Feb 27 '20 at 20:10
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    To address @RonJohn's point about FIFO - absolutely, by 2/21 the CC will consider that you have paid for the TV. It was $2400 and you've paid $2450. But you've charged $1100 on other stuff, and you've only paid $50 towards it. You need to pay the other $1050, or most CCs will charge you interest. – Rupert Morrish Feb 27 '20 at 20:12
  • @BenMiller-ReinstateMonica does it matter whether the statement date is 1/31 or 2/1? – RonJohn Feb 27 '20 at 20:14
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    @RonJohn Of course it does. Let me ask another way: Are your 1/31 payments shown on your January statement? – Ben Miller Feb 27 '20 at 20:23
  • @BenMiller-ReinstateMonica a payment made on the 31st when the Due Date is the 31st shows up on that statement, right? – RonJohn Feb 27 '20 at 20:27
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    @RonJohn I’m trying to understand your spreadsheet, but it is not clear to me what date your statement covers, what the balance shown on your January statement shows, what the due date is for the bill, etc. Your January statement will show the balance as of the statement date; whether or not the payments on 1/31 are included on your January statement determines what the amount due is on the bill. – Ben Miller Feb 27 '20 at 20:46
  • @BenMiller-ReinstateMonica statement date is 1/31. Payments that I've made on the statement date show up on the statement. – RonJohn Feb 27 '20 at 21:07
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    So, if I understand, on 1/31, you get a statement saying you have a balance of $1,600. You pay $550 prior to the due date of 2/21, so you have an outstanding statement balance of $1,050. But by the time the February statement closes on 2/29 you pay an additional $1,350, so closing out the total balance from January, and prepaying some from February. Since you pay the entire January balance before the February statement, I can believe (but have never tested) that this results in no interest being charged on the February statement. – PGnome Feb 27 '20 at 23:25
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    However, this seems it would give you an additional float of a few days, not "several months" (the time between the due date and the statement date, which for most of my cards is only 3 or 4 days). – PGnome Feb 27 '20 at 23:25
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    I have definitely had credit cards that would charge interest if the balance were not paid in full on the due date. I have always assumed this was normal. – Rupert Morrish Feb 27 '20 at 23:53
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    I think the spreadsheet needs a good deal more explanation. I certainly don't understand it. But regardless, there's a much simpler way to avoid paying interest: just sign up for a new card that offers zero interest for X months, then make at least the minimum payment every month, with a balloon payment to reduce the balance to zero in the month the 0% expires. – jamesqf Feb 28 '20 at 06:43

2 Answers2

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(The below uses month-day order.)

It's a bit of an illusion—a magic trick of sorts.

I'm going to refer to the hypothetical, fictional person in the answer you link to as RJ.

In the scenario described therein, RJ buys a TV on 1-5, then pays it off in a series of payments from 1-15 through 2-14. That's not "over several months" at all; the TV is paid off within 6 weeks of its purchase.

The remaining charges in January are paid off in a series of payments from 2-14 through 2-28. On 2-21, the outstanding balance from January is $1,050, and this is paid off on 2-28, so RJ will have to pay 7 days' worth of interest on $1,050.

RonJohn's point is that RJ can pretend that they're paying off that initial $2,400 charge over a period of months. Each month, they charge an additional $1,100 and also pay $1,900. What is actually happening is that they are repeatedly making new charges and paying off the old charges within 2 months. But they can imagine that they're paying all of the new charges immediately and paying off the $2,400 over a period of several months.

Tanner Swett
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    I don't know about the US, but in Canada, if you don't pay your balance in full, you are charged interest from the purchase date of each purchase, not from the due date. At least, that's what my credit contract, and google says. If it's the same for RJ's card, he will be charged more than 7 days of interest, but we don't know how much without the breakdown of the January charges.

    See: https://www.greedyrates.ca/blog/dark-secret-credit-card-grace-period-really-work/

     – JBGreen Feb 28 '20 at 02:53
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    Note that the additional charges and payments could be the same money, paid to oneself through a roundabout way. This is almost certainly against the terms of service of any payment processing system you could use to do that, and is likely to get your account closed or worse if caught. – R.. GitHub STOP HELPING ICE Feb 28 '20 at 17:39
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I agree that the spreadsheet does not make any sense.

The only due date mentioned is February 21 and so there must have been a payment made on January 21 also which is not shown at all. But maybe not. Let's assume that the credit card statement closing date is the end of each month. Most cards have balance due dates that are 25 days after the statement closing date but let's assume that RonJohn's card allows only the 21 days grace period codified in the CARD Act and so the fact that there was no payment made on January 21 means that the statement that closed on December 31, 2019 showed a $0 balance and so no payment was due and so none was made. This also tells us RinJohn's card account is in the blessed state where no interest is being charged on current purchases from the day of posting because the previous month's statement balance was paid in full by the due date. In short, the card account is in the pristine condition that we all expect RonJohn's accounts to always be.

So, what does the January 31 statement show as the closing balance on the statement (the amount due by February 21 to keep the account in pristine standing)? Well, it would have been $3500 except that RonJohn paid off $1900 of the current charges during January. These are charges that _have not been billed as yet and are not being charged interest anyway because the account is in pristine state! So, the statement balance shown on the January 31 statement is $1600 ($3500-$1900). As long as $1600 is paid by February 21, no interest will be charged. Indeed,

no interest would have been charged if RonJohn had simply kept his checkbook shut from January 1 through February 21 and paid $3500 in a lump sum on February 21. Nor would any interest be charged on the purchases made in February (billed in the statement with closing date February 29) because the account would have continued to be in pristine state! If one has paid the previous month's closing balance in full by th4e closing date, no interest is charged on the current purchases.

Put another way, the same effect could have been achieved by paying off each month's statement balance in full by the due date shown on the balance statement. Heck, one can essentially get interest-free "loans" by buying expensive items with a credit card at the start of the card's monthly billing cycle and paying off the credit card statement balance in full by the due date. Not a way to get rich in these days of 0.01% interest on checking accounts, but still a way to get a pork-bristle purse out of a sow's ear instead of just porcine earwax. There can, of course, be many good reasons why multiple payments are made on a credit card instead of just one lump sum by the due date. One possibility is that the card holder is paid weekly and so prefers to make make payments on a weekly basis, but the claim that a large charge has been carried forward for several months without paying any interest whatsoever is misleading. At best, one can put off the payment for 55 days (charge made on the first day of a billing cycle and paid off in full 25 days after the billing cycle closes a month later) which is less than two months.

Dilip Sarwate
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