Credit card statements can leave consumers dumbfounded. The language is fuzzy and difficult to understand and the terminology is confusing. With this simple guide you can get one step closer to understanding what you really need to know about reading your credit card statements.
Average Daily Balance
The Average Daily Balance is a method of calculating interest on the account. Each day the transactions are tracked. The card companies add the beginning balance for each day to the charges made that day. To determine the amount of interest paid, this amount is divided by the days in the billing period. The sum of the balance owed each day is added up and then divided by the number of days in the billing cycle.
For example, to determine the average daily balance on an account that has been charged with the following purchases:
April 5th – $10
April 5th – $20
April 7th – $50
April 15th – $10
April 20th – $100
April 30th – $10
The Average Daily Balance for the month of April would be:
Average Daily Balance = ($10 + $20 + $50 + $10 + $100 +$10)/30
= $6.67
This amount represents the daily balance that the card company uses to calculate the interest on the account.
Annual Percentage Rate
The Annual Percentage Rate (APR) is the rate that banks and other lenders charge borrowers for the privilege of borrowing money. It includes the interest rate and any fees that are included. APR must be disclosed and lenders are required to identify the APR prior to finalizing any agreements.
Interest Rate
Interest Rate is the percentage used to calculate how much more consumers have to pay for using the credit card. It is the fee paid to use the card. Interest rates are subject to change but the lender has to notify the card holder of any rate changes.
Over the Limit Fees
Over the limit fees are added to the balance of an account when the user exceeds the credit limit. Under new legislation, users must ‘opt in’ to permit over the limit use of a card. If the card holder does not give permission any purchases or charges that exceed the limit will be denied at the point of purchase. This is one way consumers have reined in the over use of their cards.
Minimum Payment
This represents the minimum amount that users are required to pay each month. Paying the minimum amount each month avoids the card holder from defaulting on their payments and getting a poor credit rating. Each card can calculate their minimum payments differently but generally it is a set percentage of the balance owing.
Remember that the majority of the minimum payment is going toward the interest payments and financial charges and little is being used to reduce the amount owing. Take for example a card with a balance of $1,000 with an APR of 18%. The monthly rate is 1.5% and assuming that the minimum payment has a set rate of 2.5% per month.
With the above example the minimum payment would be ($1,000) (0.025) = $25. Keep in mind that 1.5% of the $1,000 or $15 will be used to pay the financial charges leaving $10 ($25-$15=$10) to be used to pay off a portion of the balance.
Statement
The statement itself is the credit card bill that comes regularly in the mail. It outlines how much is owed and keeps track of the transactions and where they occurred. It includes new purchases, previous balance, cash advances and financial charges. According to the new CARD Act, the statement must be received at least 21 days before the payment is due.
Understanding the credit card statement and knowing how companies come up with the amounts will give consumers the necessary information to make better choices on how to spend their money.
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