If you’ve had a credit card for more than a month, you probably have noticed that your purchases are charged interest. For cards without a grace period, purchases are charged interest from the moment the purchase is made; while credit cards with a grace period (typically 21 days or so) at least give you some time to pay off the balance before they begin charging interest on the remaining balance. What you may not fully understand is the calculation of APR and how it includes the finance charges.
Every Credit Card Company Uses a Different Method of Calculation
There is no one-size-fits-all program for calculating your APR. By law, you have to receive a written statement from your credit card issuer regarding how much you are charged in interest, and the method they’re using to calculate the interest. It’s typically written in a light-weight paper booklet that you receive when you first receive the card – and then receive again with every change to the terms of your card.
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One of the banes of the credit card industry is the fact that they charge exorbitant interest rates and fees on credit cards and other loans. They have no compulsion to do otherwise – this is the way they make money. Many times the borrower is left in such a poor financial state with each new credit card that it is almost impossible to dig out if they have fallen behind on the payments.
Often times the borrower feels that there is no way out but to file for bankruptcy. This should be the last resort, because there are still options for the borrower. And, even though the lenders put up a strong front of arrogance and being in control, the simple fact remains that they would rather settle with a customer than to become a party in a bankruptcy case in which they lose it all. It is a wise consumer who knows this and uses it to their advantage.
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The numbers are shocking: 50% of American card holders don’t realize they’re paying a penalty interest rate on their balance. If they do know about the inflated rate, they don’t understand why it has been applied to their balance. This is only one of the discouraging statistics turned out by the Center for Responsible Lending. Their study shows that, when it comes to credit cards, what you don’t know can hurt you.
Changes to Interest Rates
The way that credit card issuers handle interest rate change notifications has come under criticism. Namely, they don’t ensure that the customer knows how much interest they’re paying or why.
A hike in interest could be the result of a late or missed payment, or could come about simply because the company increased their interest rates in general. Be aware that card companies reserve the right to change your interest rate with as little as 14 days’ written notice.
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By law, credit card companies have to disclose their fee schedules to consumers. The trouble is, the calculations of these fees and finance charges are often found in the fine print of the account disclosure statement you receive when you first open your credit card account. In this case, what you don’t know really can hurt you.
Here are 6 things you might don’t know about credit cards:
1. They don’t always have a grace period. Most credit cards offer 20-30 days “grace period”, during which time you could pay your entire balance and not incur any interest or finance fees. It’s becoming more common for credit cards to have a shorter grace period, or none at all.
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You just got an offer in the mail for a low-interest credit card. That sounds great, right? Interest charges make debt pile up faster, so you’re inclined to jump on this credit offer right away.
Hold your horses, friend. Before you take the credit card company up on its offer, there are some things you need to know about low interest credit cards. They’re not all created equal, and even the phrase “low interest” can mean something very different depending on the company – or the type of charge.
When you get an offer for a credit card – any credit card – you should read the fine print before making a decision. Many companies will try and lure you in with offers of very low interest rates, or even no interest. But these rates don’t last forever. If you check out the card’s terms and conditions, you will almost always find that the really low interest rates are just part of an “introductory” period. These can last as little as three months or as long as fifteen, with six to twelve months being standard.
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Universal default – two words that should strike fear into the heart of any credit card holder. What is it? Why is it so terrible? And does your credit card participate in universal default?
Universal default is a clause in many credit card agreements which states that if the card holder defaults on payments – any payments – they can be subject to an increase in interest on their credit cards. And when we say that any payments can affect this, we mean any: utilities, car notes, mortgages, and other payments that have nothing whatsoever to do with your credit card account. This might not sound fair, but it’s the basis of universal default.
It makes sense, in a way. If you are late on payments, it can affect your credit score. And when your credit score is lowered, you become a less desirable customer for credit card companies. The agreement you signed was tailored to your credit score at the time. The same agreement might not be a safe bet for a customer with a worse score.
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Are you a good credit card customer with a bad interest rate? Well, you’re not alone. With all the added pressure from record delinquencies, the credit card industry is going through some hard times. These troubles are reflected in the recent increase in penalties, fees, and interest rates. If you’ve been late on a credit card payment – even by one day – you might be suffering from high interest rates. It’s true that credit card companies have always had the right to change your interest rate for any reason, but more customers with good credit are finding their interest rates to be exorbitant. So what can you do about it?
First, know when your credit card payment is due, and pay your balance on or before that date every month. One day of tardiness can cost you big. Be sure to stay below your credit limit. Going over it can also rack up penalty interest. And if you know you need more time to make a payment, call your card company in advance to see if they will give you a time extension.
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Have you been a loyal card holder for a long time, but still think your fees and interest rates seem high? You’re not alone. When the Federal Open Market Committee (FOMC) cut federal fund rates down to 4.75%, stock holders rejoiced.
Card holders, on the other hand, didn’t do much of anything. That’s because card rates have stayed pretty much the same for the past two years. But that doesn’t mean you should settle for inferior terms.
Competition is stiff in the credit card industry, with new cards and new products rolling out all the time. You’re actually doing your card company a favor by staying with them. They want to keep you as a customer if you carry a balance, because they want your interest payments.
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Do you have credit cards? Do you know exactly which fees you pay, and how much of your monthly payment is devoted to such fees? If not, you’re in good company; too many of us don’t know exactly what we’re paying for when we make our monthly payments. And card companies have been accused of making credit card terms and conditions too complicated for the average card holder to understand. What’s a consumer to do?
First, know what’s out there. Fees come in the form of annual fees, late fees, penalties, fees for cash advances, fees for international purchases, and even fees for paying your bills over the phone. Fees are a slight nuisance to us, but they are big business for card issuers, who took in $25 billion in late and other fees in 2006. Yikes!
There are some steps you can take to reduce the amount of money you pay out in fees. First, sign up for a card that does not charge an annual fee. Never use a credit card to take out a cash advance at an ATM. Those cash advances incur an average 3% fee upon withdrawal, and begin to accrue interest right away. Some interest rates on cash advances can reach 25%! That’s throwing money away.
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There are many reasons to avoid carrying a large balance on your credit cards. Large balances can negatively impact your credit score. They will cause you to use your hard earned cash to pay interest. Now there’s one more reason to avoid carrying a large balance: if you make a late payment, your penalty might be tied to how much you owe the card company.
It’s true; card companies make their money through fees, penalties, and interest. But some of the penalties are severe, such as what seems to be the new standard: a $39 late fee on balances of $1,000 or more. And that penalty can come from being just two days late on a payment.
If you think this seems a bit harsh, you’re right. Fees and penalties have never been stricter. The mortgage crisis is to blame; with so many bad debts being written off by home buyers filing bankruptcy, card companies are facing record losses. They are trying to recoup these losses however they can, and fees and penalties are the fastest way.
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