Adjusted Balance

Category: Finance, Credit.

Credit card offers, they re everywhere!

They pop up while you re surfing the Internet. They appear in your mailbox. They re in slick brochures next to the cash register or gas pump. If you need a new credit card, how do you choose? They re in full- page ads in the Sunday papers. You should evaluate each offer carefully, and to do that you must understand these essential terms. There may be several APRs applicable to different portions of your balance, for example an introductory rate, a regular purchase rate, and a regular cash advance rate.

Annual Percentage Rate( APR) : The interest rate charged on your account balance. (But see" Balance Calculation Methods, " because the rules for computing interest from your balance and your APR can vary. ) Your statement will usually show the APR and a monthly and/ or daily rate based on the APR that s actually used to calculate your monthly interest. A fixed APR is set by the credit card company, which can generally change it with as little as 15 days advance notice, especially if you run afoul of any of the" gotchas" in the terms. For example, many companies these days reserve the right to raise your rate if you ve been late on a payment to another, unrelated company. These" gotchas" are often very consumer- unfriendly. A variable APR is tied to some widely used economic index, such as the Prime Rate. When the Prime Rate goes up or down, so does your APR.

It may be stated as" prime+ x% , currently y% ," for example" prime+ 7% , currently 15% ." This means that when the Prime Rate is 5% , your APR is 15% . But beware, because some of the same" gotchas" apply to variable APRs as to fixed APRs. It may state that if you re late with one payment, your APR will no longer be variable but will rise to an exorbitant fixed rate, usually over 20% . Read the fine print. The penalty APR is the rate to which your APR will immediately be raised when you violate any of the" gotchas" in the terms. Again, be sure to read the fine print to see what situations will trigger the penalty APR.

This rate is usually at least 50% higher than the regular APR. You ll often see these: failure to pay this or any other account on time, exceeding your credit limit on this or any other account, excessive credit balances on your accounts in aggregate. The other part is how the balance is calculated to which the APR is applied. Balance Calculation Methods: These are important to understand, because your APR is only part of the story when it comes to calculating the interest you ll be charged each month. In any case the balance is multiplied by the daily or monthly interest rate. Two- Cycle Balance. But the balance calculation is not as straightforward as you might think.

This is the worst method from a consumer s point of view because it can lead to the highest interest calculations. To calculate the balance, add together the average daily balances for the current billing period( sometimes even including new charges) and the previous period. Unfortunately, it s also becoming the most widely used method. Here s why this is so unfriendly to you. You think it s safe to use the card in June for a new$ 100 purchase, and if you pay the$ 100 by the end of the June grace period, you won t owe any interest on it. Say you have run a balance for a few months and finally pay it from$ 200 down to zero at the end of May.

But you re wrong. In other words, you must wait two months, allow the account to cycle once with a zero balance, before it s safe to use it again- "safe" in the sense that you won t incur extra interest if you pay the balance in full by the end of the grace period. Since your average daily balance in May was not zero( say it was$ 120) , and since you used the card in June, your interest will be calculated on May s average balance again, so even if you pay the whole June purchase in June, you will still owe additional interest. Average Daily Balance. Add the daily balance for each day in the billing cycle, then divide by the number of days in the cycle. This was once the most common calculation method and is still popular.

Depending on the terms, this may or may not include new charges. This is the best method from a consumer s point of view, but it s rapidly going the way of the dodo. Adjusted Balance. Take the balance at the beginning of the billing cycle, then subtract any payments or other credits recorded during the cycle. For example, if your beginning balance was$ 1200, and you paid$ 400 during the cycle, the balance to which your monthly rate will be applied is$ 800, regardless of any new charges. Do not include new charges during the cycle. Balance Transfer: This means that you re charging card X to pay off( all or part of) the balance on card Y.

Why would you want to do this? So the balance is, transferred from card, in effect Y to card X. Usually to take advantage of an introductory low interest rate when applying for a new card. Sometimes these introductory rates last only a few months. Look closely at the terms. The best ones are for the life of the balance.

Sometimes these fees are capped at$ 75 or so. You will often have to pay a transaction fee equal to 3% of the balance transferred. Be sure to see whether or not the transaction fee exceeds what you ll save in interest. Sometimes the credit card company will agree to waive the fee, especially on a new account. If so, don t do it. Don t be afraid to ask.

Usually there is no grace period for paying off a cash advance, which means you ll be charged interest starting from the day of the loan, even if you pay it in full by the end of the billing cycle. Cash Advance: A cash loan charged immediately to your credit card account. Also this type of charge may have a higher APR than purchases or balance transfers. Note that some kinds of transactions, like buying casino chips or lottery tickets, may be treated as cash advances. Check your terms. This can also apply to writing a purchase check to your own bank account.

Credit Limit: The upper limit on your account balance. Be sure to read the fine print. Exceeding it may result in penalties. Remember that just because the company has approved you for a certain limit doesn t mean you can afford to take on that much debt. Be very careful if your balance is close to the limit( "maxed out" ), because you can exceed it without charging anything new if you fail to pay enough. Disclosure Chart: An important portion of the Terms and Conditions statement.

If you can t stand to read all the fine print, be sure that you read this part. fixed APR or APRs after any introductory rate( s) have expired. rule( s) for calculating variable APR( s) if applicable. grace period. annual fee if applicable. minimum per- cycle finance charge. additional fees if applicable, such as cash advance fees. balance calculation method. late payment and delinquency fees. over limit fees. It s a little bit like the Nutrition Statement on a food package because the law dictates what has to be listed here. Grace Period: The time, calculated from the account cycle date, during which you can pay the balance in full without having any interest charged. See" Two- Cycle Balance" calculation method for an additional" gotcha. ") Pre- Approved: This can be very misleading. This usually applies only to purchases, and only if you ve paid the previous month s balance in full and on time. (Sometimes even that s not enough. It doesn t mean the company is guaranteeing to issue you the card in the offer. They always reserve the right to deny or alter the offer based on a more detailed examination of your records.

It just means they chose you to receive this offer based on some general screening of your credit report.

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