Every month, hundreds of millions of consumers receive credit-card statements, but not everyone can decipher them.
Many consumers look past crucial information, such as finance charges, and head straight for the amount due.
They don’t realize that finance charges on large balances can add up to hundreds of wasted dollars in a year, or that they could reduce fees by switching to a credit card with a lower annual percentage rate.
Others might find their monthly statements difficult to navigate because they don’t understand two-cycle billing, charges for cash advances or other items.
“There are some companies that do a good job, and there are some that make the statement so complex that a client doesn’t know what his interest rate is,” said Catherine Klee, the manager at Credit Counseling Centers Inc.’s Brighton, Mich. office.
Klee favors one-page statements that are easy to read and have all information, including the annual percentage rate, clearly labeled.
She gives a thumbs-down to credit-card companies that fail to show consumers how monthly bills are calculated.
“We have some real winners at how these things are calculated,” Klee said. “Some have different interest rates if (cardholders) have purchases and if they have balance transfers. And then there’s another fee if there is a cash advance.”
Monthly credit-card statements typically list account numbers, a credit limit, available credit, days in the billing cycle, the payment due date, the minimum payment due, items charged, payments and finance charges. But the arrangement of the information can vary among credit-card issuers.
Klee said she likes the idea of credit-card companies adopting a universal statement.
But until they do, there are terms consumers should understand:
– Adjusted balance: A method by which payments made during the month are subtracted from the total before the finance charges are added.
– Annual fee: A charge for having the credit card. Annual fees can range from $15 to as much as $300 a year. Many credit cards do not charge an annual fee, so shop around.
– Annual percentage rate (APR): There are two types of annual percentage rates: fixed and variable.
Fixed APR means the annual percentage rate does not change over the period of time it is offered.
A variable APR means the rate can fluctuate year-to-year because it is calculated by adding a fixed amount to an index such as the U.S. prime interest rate.
Most card issuers offer a fixed APR.
– Average daily balance: An average daily balance is calculated by adding each day’s balance, then dividing that total by the number of days in a billing cycle. The average daily balance subject to a finance charge is then multiplied by a card’s monthly periodic rate, which is determined by dividing the annual percentage rate by 12.
A card with an annual percentage rate of 18 percent would have a monthly periodic rate of 1.5 percent. So if a person made $3,000 worth of purchases on a card that had a 30-day billing cycle, the average daily balance would be $100, and the daily finance charge would be $1.50, or about $45 a month.
– Grace period: The amount of time a lender allows before charging interest on the balance due.
Typically, a lender will allow 20 or 25 days to pass from the closing cycle date of the bill before charging interest. If the bill is paid in full by the end of the grace period, no interest is charged. But if only partial payment is made, interest kicks in at the end of the grace period.
– Cash advances: The money consumers can get by using their card at an ATM or buying travelers checks. Interest often is charged from the moment a consumer receives the money, regardless of whether the account is paid in full during the grace period. Some banks also charge a transaction fee for each cash advance.
– Finance charges: Finance charges can begin to build up from the date of cash advances and from the date purchases are made. They can continue to accrue until balances are paid off.
If the total new balance from the last billing statement is paid by the due date, and no balances were transferred from another account during the billing period, the individual would have until the payment due date on the current statement to pay the total new balance and avoid more finance charges.
– Late fees: Many credit-card issuers will charge a fee for late monthly payments.
– Minimum finance charge: Some credit-card companies will charge a minimum finance charge if purchases and cash advances are less than a certain amount. For example, a company might impose a 50-cent minimum finance charge if the finance charge is below 50 cents per billing cycle.
– Over-the-limit fee: Credit-card holders who exceed their credit limit can get hit with this fee.
– Previous balance method: A method in which finance charges are based on the amount owed at the end of the previous billing cycle.
– Two-cycle billing: A way to calculate the average daily balance based on two months of purchases instead of one.
Credit-card holders also can get hit with additional interest charges, because finance charges become retroactive, meaning they start accruing at the purchase date instead of at the end of the grace period, if a balance is carried.
For example, a credit-card holder has a zero balance in January. The person buys a snowblower Jan. 10. A bill arrives in February, but the credit-card holder pays off only part of the bill. When the March bill arrives, interest will be charged based on the daily balance held on the account through the month of February, minus any payments. The March bill will have finance charges based on the average daily balance since the purchase date, Jan. 10.
Here are some useful credit-card tips:
– Shop around for best rates
Many credit cards have hefty interest rates of 19 percent or more. But there are lower-rate cards around. Call Cardtrak at 800-344-7714.
Several Web sites provide comparative data on credit card rates and their terms:
CardWeb (www.cardweb.com/)–Provides information on low-rate credit cards, credit repair and counseling.
Bank Rate Monitor (www.bankrate.com)– Offers information on credit cards and low rates.
CreditChoice (www.creditchoice.com)–Provides information on low initial and ongoing rates, and no-annual-fee cards.
– Lowering your rate saves money
Ric Edelman, the author of “The Truth About Money,” (Harper Collins, $25) suggests borrowing money to lower credit-card debts.
For example: “Say you owe $5,000 to an 18-percent VISA card. Maybe you can get a new VISA card from another bank that charges only 14 percent. Take $5,000 from the new card to pay off the balance on the old card–and, in essence, you’ll cut your interest rate to 14 percent from 18 percent.”
– Read the fine print
Before you get excited about a credit-card company boasting a 3.9-percent interest rate, read the fine print.
Those rates are often for consumers who transfer balances to another company’s credit card or are introductory offers.
If you miss one payment, your interest rate could more than double. If you miss two payments in a six-month period, your interest rate could climb into the double digits.
In other cases, the low rate may apply only to new purchases, not old balances or balances you transferred from another card.
– Be careful when transferring
Some companies might charge a fee for transferring balances to their cards. Pay attention to how monthly payments affect the transferred balance. Some companies will apply payments to the outstanding balance first, leaving the transferred balance to accrue finance charges.
But hopping from credit card to credit card could have a negative effect on your credit ratings and the ability to qualify for lowest rates.
– Pay more than the minimum
Many people who pay the minimum monthly payment have no idea how much money they’re throwing away.
Edelman uses this example in his book:
“Say you’ve got an 18-percent credit card with a balance of $1,800. If you pay only the minimum each month, it will take you nearly 14 years to eliminate the debt.
“But if you pay just $10 more per month, you’ll get rid of the debt in less than four years, saving you 10 years and $1,400 in interest.”
– Seek higher minimum payments
Many look for cards that offer low monthly payments. But that’s not always wise, according to Gerri Detweiler, author of “The Ultimate Credit Handbook,” (Plume, $11.95).
She writes that most card issuers require monthly payments from 3 percent to 5 percent of the outstanding balance every month. But a few require 2 percent, which could be misleading. For instance, an individual could carry a balance of $1,000 and pay only $20 a month. But a person paying 5 percent would pay $50 a month and could pay off the balance sooner.
