Banking, Cards and Credit · Lesson 5 of 9 · 13 min

Credit cards: interest, minimum payments and grace periods

A credit card can be a safe, convenient tool or an expensive trap, and the difference is almost entirely how you repay it. This lesson shows, with real numbers, why paying only the minimum costs so much.

How a credit card works

A credit card lets you borrow up to a set limit. Each month you get a statement showing what you owe and a payment due date.
If you pay late you usually pay a late fee, and if you carry a balance you pay interest on it.
The minimum payment is the smallest amount the bank accepts to keep the account in good standing. It is not what you owe.
Card terms, fees and interest rates differ between banks, so always read the card's key terms before applying.

The grace period: when purchases are interest-free

The grace period is the time between the end of a billing cycle and the payment due date.
If you pay the full statement balance by the due date, you usually pay no interest on new purchases.
Grace periods are not guaranteed, but most cards offer one on purchases.
If you do not pay in full, you pay interest on the unpaid amount, and new purchases may also attract interest from the day you make them.
Paying in full only some months can cost you the grace period for the month you miss and the following month.

Cash withdrawals are different

Cash advances (withdrawing cash on a credit card) generally attract interest from the day of the withdrawal, with no grace period.
There is often a separate cash withdrawal fee as well, so check your card's terms.
If you need cash, use your debit card instead.

Worked example: paying only the minimum

Assumptions (illustrative, not any real card): balance AED 5,000; interest of 3% a month on the balance; minimum payment of 5% of the balance or AED 100, whichever is higher; no new spending; no fees.
Month 1: interest is 5,000 x 0.03 = AED 150, so the balance becomes AED 5,150. The minimum is 5% of 5,150 = AED 257.50, leaving AED 4,892.50.
Paying only the minimum every month, it takes 74 months (just over 6 years) to clear the debt. You pay AED 10,280.53 in total, of which AED 5,280.53 is interest: more than the original AED 5,000.
Paying a fixed AED 500 a month instead clears it in 13 months, with AED 1,033.77 interest (AED 6,033.77 in total).
Paying AED 1,000 a month clears it in 6 months, with AED 501.86 interest.
The lesson: the minimum falls as the balance falls, so the debt drags on for years. Pay in full, or as much above the minimum as you can.

Habits that keep a card working for you

Set up an automatic payment for the full statement balance from your current account.
Treat the credit limit as a ceiling, not as spending money. Using a large share of your limit can lower your AECB score.
Never miss a payment: payment history is a key part of credit scores in the UAE and UK.
In the UK, Section 75 of the Consumer Credit Act may let you claim a refund from the card provider for faulty or undelivered goods bought on a credit card.

Practise in real life

Tick each one off when you have done it.

Recalculate month 1 of the worked example yourself, then month 2 (interest AED 146.78, minimum AED 251.96, new balance AED 4,787.32).
Find a real credit card key facts document online and identify the monthly interest rate, minimum payment rule and late fee.
Write down your own rule for a future card, for example: 'Full balance paid automatically every month.'

Remember

Minimum payment is not what you owe.
Pay the full balance by the due date to keep the grace period.
Cash on a credit card is charged interest from day one.
In the example, minimum-only payments cost more in interest than the original AED 5,000.

Note: The worked example uses illustrative assumptions (3% a month, minimum 5% or AED 100), not the terms of any real card; actual UAE card rates, minimum payment rules and fees vary by bank and are listed in each card's key facts statement. Figures were computed month by month, rounding to the nearest fils each month. Grace period rules are summarised from the US CFPB; UAE cards usually work similarly but check your card's terms.

Check yourself

1. What is a credit card grace period?

2. In the worked example (AED 5,000, 3% a month, minimum 5% or AED 100), what is the first month's minimum payment?

3. In the same example, roughly how much interest do you pay in total if you only ever pay the minimum?

4. When does interest usually start on a cash withdrawal made with a credit card?

5. What usually happens if you do not pay the full balance by the due date?