Balance Computation Method for the Finance Charge
If you don't have a free period, or if you expect to pay for purchases over time.
It's important to know what method the issuer uses to calculate your finance
charge. This can make a big difference in how much of a finance charge you'll
pay -- even if the APR and your buying patterns remain relatively consistent.
Examples of balance computation methods include the following:
- Average Daily Balance
This is the most common calculation method. It credits your account
from the day payment is received by the issuer. To figure the balance
due, the issuer totals the beginning balance for each day in the billing
period and subtracts any credits made to your account that day. While
new purchases may or may not be added to the balance, depending
on your plan, cash advances typically are included. The resulting daily
balances are added for the billing cycle. The total is then divided by the
number of days in the billing period to get the "average daily balance."
- Adjusted Balance
This is usually the most advantageous method for card holders. Your
balance is determined by subtracting payments or credits received
during the current billing period from the balance at the end of the
previous billing period. Purchases made during the billing period are
not included.
This method gives you until the end of the billing cycle to
pay a portion of your balance to avoid the interest charges on that
amount. Some creditors exclude prior, unpaid finance charges from
the previous balance.
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Previous Balance
This is the amount you owed at the end of the previous billing period. Payments,
credits and new purchases during the current billing period are not included.
Some creditors also exclude unpaid finance charges.
Two-cycle Balances
Issuers sometimes use various methods to calculate your balance that make use
of your last two month's account activity. Read your agreement carefully to find
out if your issuer used this approach and, if so, what specific two-cycle method is
used.
If you don't understand how your balance is calculated, ask your card issuer.
An explanation must also appear on your billing statement.
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Other Costs and Features
Credit Terms Vary Among Issuers
When shopping for a card, think about how you plan to use it. If you expect to
pay your bills in full each month, the annual fee and other charges may be more
important than the periodic rate and the APR, if there is a grace period for
purchases. However, if you use the cash advance feature, many cards do not
permit a grace period for the amounts due -- even if they have a grace period for
purchases. So, it may still be wise to consider the APR and balance computation
method. Also, if you plan to pay for purchases over time, the APR and the balance
computation method are definitely major considerations.
You'll probably also want to consider if the credit limit is high enough, how widely
the card is accepted, and the plan's services and features. For example, you may
be interested in "affinity cards"-- all-purpose credit cards sponsored by professional
organizations, college alumni associations and some members of the travel
industry. An affinity card issuer often donates a portion of the annual fees or
charges to the sponsoring organization, or qualifies you for free travel or other
bonuses.
Special Delinquency Rates
Some cards with low rates for on-time payments apply a very high APR if you are
late a certain number of times in any specified time period. These rates sometimes
exceed 20 percent. Information about delinquency rates should be disclosed to
you in credit card applications or in solicitations that do not require an
application.
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Cardholder Protections
Federal Law protects your use of credit cards.
Prompt Credit for Payment
An issuer must credit your account the day payment is received. The exceptions
are if the payment is not made according to the creditor's requirements, or
the delay in crediting your account will not result in a charge.
To help avoid finance charges, follow the issuer's mailing instructions. Payments
sent to the wrong address could delay crediting your account for up to five days.
If you misplace your payment envelope, look for the payment address on your
billing statement or call the issuer.
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