Whether you are looking for a new credit card or just want to know more about the one you already have, it is important to know how to figure out the finance charge for that card. First, though, it's just as important to understand what the real finance charges are.
A credit card finance charge is the amount of money you pay the credit card company to use their credit. This is different from the balance on the amount you bought. The purchase amount balance shows how much money you spent on things with the card. If you pay off the purchase amount balance within the time frame given by the company, you won't have to pay any interest on it. Finance charges are added to your account when you keep a balance from month to month.
Finance charges are based on the amount you still owe and the annual percentage rate (APR). The APR is the Annual Percentage Rate, and it is used by all credit cards to figure out how much money you owe. Consumers need to know that the ARP can be different from one company to the next and can even be different within the same company. This is why people should always try to find the companies with the lowest APRs. In the long run, this will save you money.
There are different ways that credit card companies can figure out how much interest to charge their customers. A lot of people don't know this, but the way you do something can affect how much money you have to pay. Here are some of the ways credit card companies figure out how much interest to charge you on your balance:
They can use one billing cycle or two billing cycles to do the math.
They can use the new balance, the balance from before, or the average daily balance.
They can leave new purchases out of the balance or add them to it.
When the company uses what is called "one-cycle billing" and the average daily balance method, which does not include new purchases, you will usually have a lower finance charge. A lot of this, though, depends on your balance and when in the month you buy things and pay them off.
The adjusted balance method and the previous balance method are the next lowest ways to figure out the finance charge. If you look at your bill, you can see which method the company is using. Most of the time, this information is on the back.
You should also know that some companies have a system for a minimum finance charge. When a credit card company uses this method, you will be charged that set amount, even if your calculated finance charge is less than that amount.
Some cash advance programmes that come with credit cards are very important to some people who have them. When getting cash advances from credit cards, people should be very careful. Many companies that offer cash advances treat cash advances differently than they do purchases. Before you get a cash advance on your credit card, make sure you know how you will be charged for that advance.
You will want to know the annual percentage rate (APR) for cash advances. Keep in mind that this could be a lot higher than the APR you pay for purchases. You should also find out if there will be any fees for the transaction. You will also have to pay fees on top of the finance charge.
Last, find out how your payments will be put on your account. Some companies will first put your payment toward your purchases and then toward any cash advances you've taken.
If you use your credit card wisely and keep track of your finance charges, you'll get more out of it and avoid some of the problems that other people run into.
