Get to know your Annual Percentage Rate (APR)
Credit companies charge a fee in exchange for letting you carry balances. These are called Interest Charges. You can avoid a Interest Charge on purchases if you pay your balance in full each month. However, if you pay less than the full balance, a Interest Charge will be added to your account. If you carry a balance from month to month, Interest Charges will add up.
APR is the interest rate, calculated on a yearly basis, which you pay on balances. If you carry a balance, the APR is the best indicator of what credit costs. The higher the APR, the more you will pay. Some credit card companies offer lower introductory rates for a limited period of time. Afterwards, these rates usually go up. To calculate the rate each month, divide the APR by 12. For example, if the APR is 18%, the monthly interest rate on carrying a balance is 1.5%.
Your APR may be tied to a specific rate of interest, such as the Prime Rate. This means your interest rate is "variable"—it could go up or down over time. A non-variable APR doesn't change the way a variable does. However, with advance notice from the card company or if you default on your payments, non-variable rates may still change at some point as permitted by law.
Your rate may also change as described in your Card Agreement or upon written notice from the company.
Where do interest charges come from?
Interest Charges are calculated in different ways. Your account statement describes the method that applies to you. In general, your balance for Interest Charges is based on one of these methods:
Average Daily Balance:
The card company adds the amount you still owe from your previous statement (if you didn’t pay in full) to all new purchases and cash advances, and then divides the sum by the number of days in the billing cycle. It is shown on your statement each month you use the card.
The card company takes your balance at the beginning of the Billing Cycle. It subtracts payments you make during the period. This means your balance is kept lower and you pay less in Interest Charges.
This method applies the monthly Interest Charge to your beginning balance for the Billing Cycle. Purchases and payments during the month that follow aren’t included.
The card company may use your ending balance for the Billing Cycle. If so, any purchases and payments during the Billing Cycle are included.
Other costs of credit
There are other fees and expenses associated with using credit cards. The more you know about these costs, the better you can control your expenses.
This is the yearly cost of owning a credit card. Not all credit cards have an annual fee. This fee may be posted to your balance when you open the account and added each year on the anniversary of your account opening.
These are charged when you fail to pay the minimum payment due by its due date. To be sure your payment arrives on time, mail it at least 5 to 7 days before it is due. Many credit card companies offer online payments through your checking account. This option is generally much faster than traditional mail and usually posts to your account within 24 hours.
These include an over-the-limit fee if your balance exceeds your credit limit. You may also be charged fees for returned checks, cash advance checks or stop-payment requests.
Manage your accounts with free tools
Fees such as late and over-the-limit fees are avoidable. They may also harm your credit history, which could make it harder for you to get credit in the future. To help manage your credit card accounts, ask you credit card issuer if they offer the following tools: