-- Posted: Oct. 24, 2000

 Ask the Dollar Diva By Dorothy Rosen • Bankrate.com

How do I compute the monthly finance charge?

Dear Dollar Diva,
I have a credit card charging 28.6 percent annual percentage rate (APR.) However, when I computed the monthly rate this month, it came to 24.22 percent -- for the month!

My balance last month was \$1,203.38. The daily rate is .07814 percent. My interest charge was \$29.15, and my minimum payment only \$40. Is this legal? I feel as if I am being scammed.

You're smart to check the math when your bills come in; mistakes can happen. In this case, there's no error; you just got your decimal point mixed up when you made the computation.

Here's how the computation works: .07814 percent equals .0007814 (the decimal gets moved two digits to the left). If you multiply .0007814 times 31 days, the monthly rate is 2.422 percent, not 24.22 percent.

The actual monthly rate is 2.422 percent; multiply that by your balance of \$1,203.38, bingo, there's your \$29.15 finance charge. That's a lot of money going out the door for nothing each month.

It gets even more painful when you analyze the minimum monthly payment. All the company wants is \$40, of which \$29.15 is for interest. That's a whopping 73 percent of your total payment going toward interest, and a paltry 27 percent going toward reducing the debt. Continue making those tiny minimum payments, and expect to be married to this debt well into the next decade.

Smart people use a credit card for convenience. Plastic is easier to use than checks, and the transactions can be downloaded into Quicken or Microsoft Money to keep track of what's going out each month. Smart people only have one credit card, and they pay off the entire balance when the credit card bill comes in. Instead of throwing their money away on finance charges, they use those precious dollars to finance savings, vacations, education, retirement and other things near and dear to their hearts.

The Diva urges you to get smart. Stop using that high interest credit card immediately, and make a commitment to pay off the current balance as quickly as possible. Use theWhiz.com calculator "What will it take to pay off my credit card" to determine how long it will take you to pay off the balance at various payment schedules. For example, if you pay \$218 a month, the debt will be history in six months.

And never again charge more on a credit card than you can pay in full when the bill comes in. You have better things to spend your hard-earned money on than finance charges.

If you're committed to dumping high-interest debt, but don't know where to begin, read the Diva's "How do I deal with credit card company dirty tricks?" for some practical "how-to" advice.

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