Before you apply for your next credit card, make sure fully understand the basics. Once you learn these terms, you'll be ready to evaluate which credit card works best for you.
The fee that is charged by some credit card companies to their credit card holders, simply for having the credit card. Keep in mind, not all credit cards have an annual fee! Annual fees are most often associated with cards with rewards and benefits.
Annual Percentage Rate (APR)
The APR is the percentage you’ll pay in a year to borrow money. If you carry a balance on your credit card each month, you will have to pay a finance charge based on your APR.
SmartTip: Before you use your credit card for a big purchase like a wedding or car repairs, you may want to consider applying for a personal loan. Personal loans tend to have lower interest rates and can be used to finance a variety of situations.
Balance Transfers allow you to transfer your balance from one credit card to another, usually to save on interest payments. Your new card will typically charge a balance transfer fee, so make sure you do the math before you make the move. Fees typically range from 3-5% of the amount transferred.
Balance (Calculating Interest)
Your finance charge (the amount you owe monthly in interest) is calculated based on your monthly balance. However, there are several ways to determine this number. Here are the two most common methods!
Average Daily Balance
The credit card company tracks your daily balance day-by-day, adding charges and subtracting payments as they occur. At the end of the billing cycle, your daily balances are added together and then divided by the total number of days in the billing cycle to find your average daily balance.
To figure out the balance due, the company looks at your balance from the end of your last billing cycle and subtracts any payments and credits made during the current billing cycle.
Consider the Following Example
Jane's balance on the first of the month is $600. She makes a $400 dollar payment on the 15th, and she also makes a $100 purchase on the 15th. How is her finance charge calculated if there are 30 days in the billing cycle and her APR is 18%?
Average Daily Balance Method
- $600 x 15 Days= $9,000
- $300 x 15 Days=$4,500
- Average Daily Balance= ($9,000+$4,500)/30 Days=$450
- Finance Charge: $450 x 30 Days x (.18/365)= $6.66 Finance Charge
Adjusted Balance Method
- Previous Balance: $6000
- Payments: ($400)
- Adjusted Balance: $200
- Finance Charge: $200 x 30 Days x (.18/365)= $2.96 Finance Charge
A cash advance is not a regular credit card charge. A credit card cash advance is a withdrawal of cash from your credit card account. Be aware that while a cash advance may be useful in an emergency, it is usually expensive. You may be required to pay a transaction fee as well as finance charges.
Your credit limit is the maximum amount the credit card company allows you to charge on your credit card. This amount is determined by your credit score, credit history, income, and other important factors.