One of the key decisions you'll make when it comes
to choosing and using a credit card is whether you will pay your
bill in total every month or just pay off part of it.
It is very important to know your "payment profile."
If you pay off just the minimum or even most of what's
due, there's a balance left. So you'll need to know how your credit
card applies its interest rate to what's not paid to know where
you really stand and what you'll be paying to maintain an unpaid
Card companies also apply fees to a number of card
uses -- for example a late fee, or an over-the-limit fee. Before
you go any further look candidly at your own credit history and
see just which problems or habits are most likely to arise in your
card use. Be honest with yourself -- do you miss payment deadlines
more than you'd like? If so, you don't want a card where the interest
rate shoots up whenever you miss a payment (not to mention the late
Payment in full
If you always pay your monthly bill(s) in full, the best type of
card is one that has no annual fee and a solid grace period before
finance charges are applied. With this card you've got convenience
and you've got it cheaply. In simple terms, paying the entire balance
every month saves you bundles.
Folks who pay off their balance every month are in
the minority when it comes to card users. Most of us revolve our
For those of us who don't always pay everything, it
helps to know how finance charges are worked out. You can calculate
what it is going to cost you as part of your comparison-shopping.
Credit card companies apply a periodic rate to your balance. But
there are different ways of applying that number, and there are
different ways of deciding what the "balance" is that
it will be applied to.
||Here are the ways the balance can be computed:
|Average daily balance
Figuring your rate
The rate that is applied to that balance is determined by a formula.
The company begins with a "base" or "index"
rate, which may be the prime rate, the one, three, or six-month
Treasury Bill rate, the federal funds or Federal Reserve discount
rate. Any movement in these rates and your credit card rate will
follow -- sometimes very quickly if it's a variable rate. To find
out what these different rates are each day, check out the Leading
funds rate table at Bankrate.
The card company adds a number of percentage points,
also sometimes called a 'margin' to this index rate to arrive at
the rate they charge you.
When the base number changes, so does what you pay.
Your card company might also use a more complex formula
-- for example a base, a margin and a 'multiplier'. In this case
the base plus margin total is multiplied by that multiplier number
to find your interest rate. That doesn't mean the number will be
higher -- it depends on both the margin number and the multiplier.
Whichever way you pay, know your grace period. This
is the time you have to pay in full before interest rates apply.
It may be 25 days. It may be less. And is it the beginning of the
26th day or the end of it?
Too trivial? Not if interest begins accruing and late
charges are triggered.