Some credit cards, such as American Express, require you to pay off all of your charges each month. As a benefit, they usually have no finance charge, and sometimes no maximum limit. However, such cards come with an annual fee.  Most cards, including Visa, MasterCard and Discover, offer what is known as revolving credit. This means they let you carry a balance, on which they charge interest (finance charges), and they require you to make a minimum payment. The minimum payment is usually between two and five percent of your current balance or $10 -- whichever is more.  You should pay attention to this percentage when the bill comes, and be cognizant of the fact that the lower the percentage (or required payment), the longer it will take you to pay off your bill.  The credit card companies make more money the longer you are willing to incur finance charges.  So be smart and pay more than the minimum each month.

How do credit card companies calculate interest?  Here are the two primary methods used by financial institutions to compute finance charges:

• Average daily balance - This method, which is a pretty even-handed one and the most commonly used, works like this: The company tracks your balance day-by-day, adding charges and subtracting payments as they occur. At the end of the period, they compute the average of these daily totals and then multiply this number by the monthly interest rate to find your finance charge.
• Previous balance - This method generally favors the card issuer, according to consumer experts. The issuer multiplies your previous statement's balance by the monthly interest rate to find the new finance charge. This means you're still being charged interest on your balance a whole period after you've paid it down. This method is also referred to as the Two-Cycle Average Daily Balance.

THE BOTTOM LINE: You should know how your bank calculates finance charges.

Late fees and over-the-limit fees are a couple of newer charges that are used by pretty much all credit-card issuers now. And increasingly, issuers are drastically raising interest rates (to as high as 23.99 percent) after a set number of late payments (read the fine print and make sure you know whether the payment is considered posted on its postmarked date or on the date the bank or credit-card company gets it posted). Unfortunately, once you have a couple of late payments, the credit-card company can charge you the inflated interest rate for the remaining life of the account. Try to avoid this -- all credit-card companies report your payment record to the credit bureaus which is then recorded onto your Credit Report and even a few late payments could cause you problems when you try to buy a car or a house.  Your late payments on one card agreement can even affect your interest rates on other card agreements.  This is often referred to as a universal default clause which many banks have migrated toward.  In other words, if you pay late on one card, another and different card issuer you have signed an agreement with can do a periodic review of your credit report, find the late payment on your report, and consider you a greater risk, thereby raising your interest rate even though you may never have had a late payment with that issuer!  It is therefore imperative and in your best interest to pay all your creditors in a timely manner. Not to mention the late fees can be as high a $35 each month you are late.  That amount alone could potentially pay one of your utility bills or a cell phone expense.  Don’t throw money away.

What should you do if you know you are going to be late, and there’s nothing you can do about it?  First, you should call your credit card company before they call you.  Explain your situation, and let them know when you can send the money or if you can only send some amount less than the minimum payment.  This action will indicate your responsibility and there is nothing to be ashamed of, but you should really plan on consolidating your debt, and paying it off as fast as possible – even if that means going without a few luxuries for a while.  You’ll have a lot more money to spend in the future on niceties if you work on paying off interest-incurring debt today.

Another aspect of your payment cycle is referred to as the Grace Period.  This “free” period lets you avoid finance charges by paying your credit card balance in full before the due date. Knowing whether you have a free period is especially important if you plan to pay off your account in full each month. Without a free period, the issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account.  If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you'll have enough time to pay.

Another thing to watch out for are the cash advance fee charges, and the interest rate applicable to cash advances, which are often very different from your regular rate.  Credit card companies make a lot of money off the cardholders in this way.  Many cards charge a 3% transaction fee, so you are paying $30 right out of the gate to access $1,000 of cash.  Furthermore, you need to be cognizant of the APR applied to cash advances.  In some cases, your regular APR may be 9.9%, but little did you know that your balance on a cash advance could be a whopping 23.9%.  It is not advised that you use your credit card company to access cash, even though they will try and seduce you with the “convenience” checks often sent along with your statement.

When paying your bill, you should be asking yourself this critical question:  who would I rather have my money, me or the credit card company?  Using illustration, you can quickly see how much money is potentially at stake.  The following table assumes an outstanding credit card balance of $9,000.  Depending on your interest rate and the monthly payment you make, you can see how long this debt will take you to pay down, and how much interest you will pay along the way:

Based on an Interest Rate of 5.9%

Based on an Interest Rate of 7.9%

Based on an Interest Rate of 9.9%

Based on an Interest Rate of 12.9%

Based on an Interest Rate of 15.9%

Based on an Interest Rate of 18.9%

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