Understanding Credit Card Terms
The easiest way to cut your credit card costs is to switch to a card with a lower interest rate. But before you start to do that you should make sure you understand all the terms and regulations that go behind every card. For example do you know how finance charges are calculated? If the answer to this question is no, keep reading.
Grace Period:
Most credit card offer this service. Simply stated it is the time you have to pay off your purchases before you have to pay any interest. Usually the time is 25 days. When you buy something you will not be charged any interest for that purchase until your next billing cycle. If you pay for it during your current billing cycle you will be charged no interest at all. Check your contract to see what your grace period is for your credit cards. Each credit card company is different and some does not offer this service. You should try to make sure your current credit card companies do offer it. It is a great way to avoid interest payments and to save money.
Cash advances:
Simply stated this is a loan against your credit card. This loan is usually transacted through an ATM machine. There is also usually a special fee added on when using this feature. The fee is based on a percentage of the amount your borrowed. Usually this fee is 2 to 3 percent.
Some credit card companies charges a minimum cash advance fee as high as $5. If you borrow $20 you will be charged $20 plus the additional $5. There is also usually no grace period for cash advances. This means you pay interest starting on the day you borrow the money until you pay it off completely.
The interest rate on cash advances are also usually higher than normal purchases.
You should not use cash advances unless it is a real emergency.
Other fees:
Annual Fee:
This is a fee you pay once a year just for owning the card. If your credit is good look for a credit card without this fee. You pay interest rates you shouldn’t have to also pay for the privilege of owning the card.
Late fees:
If your payment for the month is not paid on time, you are billed a fee for this. This fee can be pretty high. So write down when your payment is due and never forget it. When you are late the credit card company can and usually will also turn this in the credit agencies. This mean a negative mark on your credit score.
Over-credit fees:
This is a fee for spending more than your credit is. Keep track of every time you use your credit card and keep track of how much you spend.
Now for the big thing you must understand.
Minimum monthly payments.
This is the lowest amount you can pay and still be in good standing with the credit card company. Sad thing is that most people can only afford this payment. This means it can take years to pay off your debt and a lot more interest. What should you do? If at all possible, start paying more each month. If you can pay double the amount that is the ideal way to start paying off your debt. But even an extra twenty or thirty dollars a month can help. Some credit cards also turn in extra payments to the credit scoring companies. If you pay more than the monthly payment each month, your scores can increase.
Finally, understanding how interest in calculated.
Every day the bank adds up your charges and payments to see what is owed. These totals are added up and divided by the number of days in the month. This is how your average daily balance is calculated.
Next the bank divides its annual interest by the number of months in a year. This gets your monthly interest rate.
The bank multiplies your average daily balance by the monthly interest rate to obtain your finance charges for that month. This is your interest payment for that month.
Understanding all of this, is the first step in dealing with your credit card debt. If you don’t understand how interest is figured it can be harder for you to decide how to pay it off.
Remember to try to make more than your minimum payments, make your payments on time and when you can pay off any purchases during your grace periods. These steps can help you gain control of your finances.
