Credit Costs
Interest
When you use your credit card, the issuing bank is really giving
you a loan for the amount of your purchases. The bank charges a
fee, called interest, for using its money. The credit card company
pays the dress shop or the furniture store within a few days of
the transaction, and you must begin repaying the loan when your
monthly statement arrives in the mail.
All interest charges can usually be avoided by paying the balance
in full within the time limit specified on your statement. Obviously,
the quicker the balance is paid in full, the less interest is paid.
Be sure to learn about the terms and policies of your credit card.
Interest calculation method
Banks use various methods to calculate interest, and it's up to
you to learn how your bank computes these charges. Unlike a house
mortgage or a car loan, credit card interest can be charged by the
day or by the month. If you do not pay the balance in full, interest
on the unpaid amount, or revolving balance, will be added to the
total amount owed. When this happens, you are paying interest on
interest - also called compound interest. If you have a large balance,
paying only the minimum amount each month can be an expensive way
to use your credit card.
The outstanding balance computation method
If the grace period runs out and you still have not paid the entire
balance on your card, any new purchases you make can be included
in the total balance immediately and will begin to accrue interest
from the date of purchase.
Cash Advances
The issuing bank or financial institution treats cash advances like
loans, not like purchases of merchandise. When you take a cash advance,
interest begins to accrue differently - sometimes without a grace
period and at a higher rate. Check with your issuer for the cash
advance details associated with your credit card.
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