You can learn how to finance credit cards in a number of ways, including using online sources. Credit cards are easy to use and can be very convenient for making purchases. However, if not used carefully, using them can lead to high credit card debt. One way to keep this debt at bay is to learn how credit cards work.
Use our credit card finder to review the rates and terms of the credit cards in your wallet!
When you found your current credit card, you may have used an online credit card tool like the one here. Although this is a convenient and quick way to be approved for a credit card, you may have not taken the time to look closely at the terms of the card and how the finance charges work. In the long run, this can lead to trouble.
What does a finance charge mean?
When you use a credit card, you are essentially taking out a loan from the credit company. The interest that the company charges you on the principal you borrowed is called the finance charge. The finance charge also includes any fees you may be charged such as fees for paying your bill late, transferring balances, going over your credit limit, and other transactions.
Finance charges for the interest rate charged vary from credit card to credit card so you should compare cards closely in regards to what is charged for the APR, or annual percentage rate.
How do credit card companies come up with the interest rate?
Different credit card companies charge different interest rates on your credit card. The interest rates are based on what the prime lending rate is set by the federal government. The companies then can charge you more, based on a number of things.
Your credit history and credit score can affect how much interest rate you are charged on your credit card. If your credit score is higher, your interest rate may be lower, and if your score is lower, you may have a higher interest rate. Not all credit card companies use credit to determine your APR, but many do.
Do credit card companies determine finance charges differently?
Credit card companies compute finance charges based on different methods. Some companies will charge interest starting the first day you made the purchase, some will begin charging interest when your monthly statement is ready, and others will wait to charge interest until after the payment is due.
Many companies will determine your finance charges using the average daily balance and some will use other methods.
How do I know what method my credit card company uses to compute finance charges?
When you search for credit cards online, they should list the terms of the credit card, including the interest rate, grace period, and any fees associated with it. Ideally, the more detail the better. The best way to find out exactly what methods your credit card uses to determine finance charges is to look at the paperwork that was included when you first received your credit card, or look at your monthly statement.
This paperwork will list the terms and finance charges. Be sure to read all of it, including the fine print, as some of the finance charge terms will be located in different places.
Can I find directions for calculating my finance charges online?
Once you have determined what terms and methods your credit card uses to calculate your finance charges, you can find out exactly what your charges are on a monthly, weekly, and daily basis. You can be walked through this process just by doing a search online and finding a site that will list the steps.
The web also has other tools to help you understand your credit card charges better. You can find out things such as how much total interest you will end up paying for a purchase and how long it will take to pay off your balance just by going to the SmartMoney website.
How can I avoid finance charges?
When you begin to calculate your finance charges, you can see that they add up quickly. This is wasted money and can be avoided.
The best way to avoid finance charges is to pay your balance in full every month. This will prevent any interest from being charged. You should also pay your credit card bill on time, if not early, every month in order to avoid late fees. Also, be careful not to spend over your credit limit and only transfer balances if you need to or there are no fees associated with it.
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