Credit Card Debt – Monthly Payments and Finance Charges

Some Australian cards require cardholders to pay off credit card debt in its entirety each month. As benefits, they normally do not charge finance fees and at times, no maximum limit. Most cards being offered today are known as revolving credit. This means cardholders are allowed t carry a balance.

Any outstanding card debt will earn interest that cardholders must pay. In addition, you are given a minimum amount to pay credit card debt. Often, the minimum amount of payment is 5% of your current balance.

Knowing how finance charges are being calculated by card companies is important. This gives you a better idea how your credit is being computed. The following are the three methods used by card companies to determine an individual’s finance charges:

Adjusted Balance

This method is widely believed to favour the cardholders. This method takes the balance from your previous statements, adds new fees, subtract the payment you made and then it is multiplied by the monthly interest rate.

Average Daily Balance

This is the most commonly used system by many card companies. First, your card company tracks your balance each day. They add charges and subtract payments as they occur. At the end of the period, they will calculate the average totals of these and then multiple the number by the monthly interest rate to determine finance charges.

Previous Balance

Note that this method is believed to favour the card company and not the cardholder. The card company will multiply your previous statement’s balance by the monthly interest rate. This means that cardholders will still be charged interest on their balance a whole period after they pay off credit card debt.

The bottom line is, the amount that a person will pay will depend on the balance, the interest rate that applies and the way additional fees are calculated by his/her respective card companies.

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Credit Card Finance Charges Aka The Gift That Keeps On Giving – Forever

Do you ever really stop and look at your entire credit card statement when it comes? Most consumers look for the minimum due payment and that is what they send. The Credit Card companies know this and count on it. The vast majority of profit made on credit card portfolios is derived from finance charges and other fees.

I will be the first to agree with anyone that says that credit cards should come with a warning label attached, much like cigarettes. Credit Cards are the driving force behind most people’s financial cancer. During the heady days of 20 percent yearly equity lifts on your property, it didn’t really much matter. Everyone could just go and refinance their house, pay off all those cards and start fresh. Or so everyone thought!

I am not one of those people that feel bad for all those poor mortgage people that are out of work right now because frankly they fueled the problem. When mortgage brokers were pulling in $20k or more in monthly commissions giving loans to people that they had no right doing is unconscionable. This behavior is the exact reason that I left the credit industry.

Finance charges are the reason that if you had a $2000 credit card with a 19 percent interest rate will take you 17 years to pay off if you only paid the required monthly due and never use the card again. Now most banks have altered their required payments from 2 percent to 3 percent to reduce the payoff time. Don’t confuse this change with the banks and credit card companies wanting to do the right thing for the customer. They were required to in an effort to quiet the buzz that has recently been brought to light through congressional inquiries.

If you keep nothing other than the Card itself when the new plastic is sent to you, SAVE THE CONTRACT. This is singularly the most important document in understanding how your finance charges are calculated. Make no mistake here every piece of that contract is there to protect the bank and to increase their profitability. Visa and Mastercard have certain requirements that are also built into the contract.

Now there are so many different types of methodologies that the card issuers use to calculate your finance charges that I could write an entire book on the subject and five minutes later it would be out of date. There are groups of analysts at every since credit card company that their primary job requirement is to determine new ways to “squeeze” money out of the portfolio.

Steps you should take to understand your finance charge calculation methodology:

1. Call every credit card company that you do business with and request that they send you a copy of your agreement. Make sure they send you the most updated version, because they typically change them every year. a. Some banks may try to charge you for this information; however you can usually talk them into giving you a freebie. This can be dependent on how long you have been a customer of the card company.

2. Create a file to keep all of these copies.

3. Once you get the contract, READ IT! Yes, you will need to get out a magnifying glass because they all use tiny fonts to get all this information on one 3 fold piece of paper.

4. If there are terms in your contract that you do not understand, use the web to figure out what it means or better yet call your credit card company and ask. This is a great way to find out how well the companies that you do business with actually train their people. (You may find that you will be talking to someone in India, Costa Rica or any other low cost outsourcing country.

5. Always read every piece of paper that comes addressed from your credit card company. They are notorious for sticking the “Change in Terms” inside the statement that no one reads.

On a final note, with the “green movement” taking over every company and becoming so en vogue, I personally do not opt in to the “online statements”. The credit card companies are using this green movement to line their pockets. Guess what, it costs them millions of dollars in paper and postage to mail all those pesky statements to their customers. I personally like the paper statements. Call me old fashioned but it makes it a whole lot easier to sit down and do your budget and pay your bills when you can actually hold them.

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