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finance charges
Finance Charges |Fees |Cash Advances
How Cards Work The Language of Credit Cards |Credit Cards and You
A finance charge is the what you owe for using credit.
A finance charge, or interest, is usually figured as a percentage of your outstanding bill. Although some banks and other lenders have reduced their interest rate in recent years, you tend to pay higher rates on credit card charges than for any other loans.
Some companies offer lower rates to attract new customers or to keep old ones. But they may make up the difference through higher fees or eliminating the grace period.
All the details are spelled out in the agreement the card company sends you and in the terms and conditions on the back of your monthly statement, though they're sometimes hard to find in letters you get offering you a new card.
WARNING: When your credit company says you can skip a month's payment, they usually don't emphasize that you'll owe interest on the balance. It's a way for them to make money.
grace period If your credit card has a grace period, you can use credit practically for free.
A grace period is the time you have to pay your bill before a finance charge is added to the outstanding balance. It's usually 25 to 30 days after the statement date. However, some banks with low interest rates have no grace period, and start charging interest from the date of your purchase. That can make using credit very expensive.
For example, with a grace period, you can make a purchase right after you get one month's bill, and you won't have to pay for it until the end of the next payment period--maybe as long as 45 days. And it won't cost you anything in finance charge.
However, if you don't pay a bill in full, there's no grace period. You'll pay interest on all new purchases from the day you make them.
payment habits Your payment habits affect the cost of using credit cards.
If you "roll" your account and pay only the minimum amount due each month, you should look for a bank with the lowest finance charges, since you'll be paying interest every month. But if you pay the full amount you owe on time, then finance charges are not the issue -- look for a bank with low fees and a long grace period.
figuring charges The method your lender uses to figure the finance charge affects the cost of credit.
Suppose you pay an 18% annual finance charge (1.5% per month) on amounts you owe. Your previous balance is $2,000, and you pay $1,000 on the 15th day of a 30-day period. The interest you owe will depend on the method used to calculate your finance charge.
Method Description Interest You Owe Adjusted Balance The company subtracts the amount of your payment from the beginning balance and charges you interest on the remainder. This method costs you the least. $15.00 Average Daily Balance The company charges you interest on the average of the amount you owe each day during the period. So the larger the payment you make, the lower the interest you pay. $22.50 Previous Balance The company does not subtract any payments you make from your previous balance. You pay interest on the total amount you owe at the beginning of the period. This method costs you the most. $30.00
There is usually a fee for using your account--and other ones for making mistakes.
In addition to an annual fee of $15 to $35 or more, banks and other credit card issuers may charge extra fees for special situations. For example, if you exceed your credit line, you may be charged an over-limit fee, usually about $10. And if your minimum payment is overdue, there's often a late payment fee as well.
In contrast, some companies charge no annual fee at all as an incentive to use their cards.
Cash advances may save you in a pinch, but you'll pay for the convenience.
Some banks charge cash advance fees for money withdrawn from an automatic teller with your credit card. And don't forget: you start paying interest on cash advances immediately -- there's no grace period.
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