When it comes to choosing and using a credit card, then one of the key decisions that you’ll make is that whether you will pay your bill in total every month or just pay off part of it.
To know your "payment profile" is really very important for you.
There will be a balance left in case if you pay off just the minimum or even most of what’s due. So in order to know where you really stand, you’ll need to know that what interest rate is charged by your credit card to what’s not paid and it is also necessary to know that what you’ll be paying to maintain an unpaid balance.
Analyze your Credit History
Fees is applied by card companies to a number of card uses — for instance a late fee, or an over-the-limit fee. Before you go any further honestly take a look at your own credit history and analyze that which problems or habits are most likely to arise in your card use. You should be honest with yourself – have you missed payment deadlines more than you would have ever like? If yes than you should not select a card where the interest rate shoots up whenever you miss a payment.
Payment in full
If every time your monthly bill(s) are paid by you in full, then for you the best type of card is one that has no annual fee and by which a solid grace period is offered before finance charges are applied. If you have such card then it will provide you convenience and you’ve got it cheaply. Simply saying, if you pay the entire balance every month then you would save bundles.
When it comes to card users, then such folks by whom the entire balance is paid off every month are in the minority . Most of us revolve our debt.
Those people who are not use to of paying everything, it is good to know for them that how finance charges are worked out. As a part of your comparison-shopping, you can calculate what it is going to cost you . A periodic rate is applied to your balance by the credit card companies. But there are different ways of applying that number, and different ways are available there to decide what the "balance" is that it will be applied to.
Ways to Compute your Balance
Following are the ways by which your balance can be computed
Average daily balance
The balance is calculated with this most common method by taking the amount of debt that you posses in your account each day during the period of billing statement and then its average is calculated.
Adjusted balance
With this method your balance is figured by subtracting the payments that have been made by from the previous balance.
Previous balance
This is the balance that is left at the end of the previous billing statement period.
Figuring your Rate
A formula is used to determine the rate that is applied to that balance. The company starts with a "base" or "index" rate, this rate might be the prime rate, the one, three, or six-month Treasury Bill rate, the federal funds or Federal Reserve discount rate. If there is any movement in these rates then it will be followed by the flow of your credit card rate, if it is a variable rate then it will be influenced quickly. You can check out the leading funds rate table at Bankrate.com in order to find out what these different rates are each day.
In order to arrive at the rate that is charged from you by your card company a number of percentage points is added by them to this index rate that is also sometimes referred to as a ‘margin’.
When there is a change in this base number then there is also a change in what you have to pay.
Complex Formula Used by your Card Company
May be a more complex formula is used by your card company, for instance a base, a margin and a ‘multiplier’. In this case what is done by the card company is that, the total of base plus margin is multiplied by that multiplier number to find your interest rate. This doesn’t mean that the number will be higher but that depends on both the margin number and the multiplier.
Whatever method you choose to pay, you must know about your grace period. This is that time in which you have to pay in full before that the interest rates is applied. May be it would be 25 days or it may be less than that. And ask your company that is it the beginning of the 26th day or the end of it?
You think that it is too trivial? No it is not if interest begins accruing and late charges are triggered.
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