What is a financial burden and how can you avoid paying one? | Credit card

Borrowing money generally costs money, and credit cards are no exception. One of the advantages of having a credit card is that you don’t have to pay off your balance every month. But this benefit comes at a price, called finance charges.

Credit card finance charges include interest and transaction fees charged on the money you borrow. These fees are added to your card balance and billed to you.

Here’s what you need to know about credit card finance charges, how they’re calculated, and what you can do to avoid them.

There are several ways you can trigger finance charges on your credit card. Some of the most common are:

Carry a scale. If you do not pay your balance in full by the due date each month and there is no promotional 0% APR period, you will be charged finance charges based on your card’s APR and remaining balance.

Typically, credit cards require relatively low minimum payments compared to balances. While some credit card issuers include an interest charge in the minimum payment, others only charge a fixed percentage. “If that minimum is less than accrued interest,” says James Philpot, a chartered financial planner and associate professor in the Department of Finance and General Affairs at Missouri State University, “you will effectively be borrowing more money from your card issuer. in order to pay interest. ”

Transfer of a balance. If you transfer a balance from one card to another, you may incur finance charges in the form of a balance transfer fee. You can also pay interest on the balance unless the card offers an introductory 0% APR balance transfer promotion. Check the card conditions before submitting your request.

Request a cash advance. If you use your credit card to withdraw money from an ATM, interest will start accruing immediately from the date of the transaction, with no grace period. The APR for credit card cash advances is often higher than the APR for purchases.

Make a transaction abroad. A foreign transaction on your credit card, whether in a country or a foreign currency, may incur foreign transaction fees. These fees typically represent around 3% of the transaction.

Since a credit card doesn’t have a set repayment period, interest is based on your average daily balance.

Your statement lists your finance charges, but you’ll need to do the math if you want to verify the details. To calculate your interest financing costs, start by converting your APR to a daily periodic rate. Find your APR on your credit card statement, then divide it by 365; note that some credit card companies divide by 360. For example, if your APR is 20%, your APR would be 0.055%.

Next, calculate your average daily balance. To do this, review your most recent day-to-day statement and write down the balance for each day. Add up all daily balances and divide the total by the number of days in your billing period. Let’s say your average daily balance is $ 1,200.

Finally, multiply your average daily balance by the DPR, then multiply the result by the number of days in your billing cycle. With a 30-day bill cycle, an RPD of 0.055%, and an average daily balance of $ 1,200, your finance charge would be $ 19.80.

Note, however, that some credit card issuers compound the interest daily, so your calculation may be even more complicated than this one.

While there are several ways you can incur credit card finance charges, you can avoid them altogether. Here are some tips to consider.

Take advantage of your grace period. Most credit cards offer a grace period on purchases. If your credit card has one, it usually runs from the end of your billing cycle to the date your payment is due. By law, you must receive your credit card bill at least 21 days before it is due.

According to April Lewis-Parks, director of education for the credit counseling organization Consolidated Credit, the length of a grace period can vary from card to card. Grace periods of 21 to 25 days are common with many credit card issuers.

During the grace period, you can pay your statement balance in full and avoid interest charges. “If you do this, you can enjoy the perks, such as points, miles, and convenience, without paying out of pocket,” says Philpot.

That said, you may still have to pay interest if your statement includes a balance that you carried forward from a previous month.

And if you miss a payment, you could lose your grace period, resulting in immediate interest accruing on every card purchase. If this happens, you will need to pay your balance in full to recover the grace period.

Grace periods also do not apply to cash advances or balance transfers. In fact, a balance transfer can also void your grace period on new purchases. Until you pay off your balance transfer in full, each new card purchase will start earning interest immediately.

Use a 0% APR promotion. Some credit cards offer an introductory 0% APR promotion to new cardholders, waiving interest charges on purchases, balance transfers, or both transactions for a set period of time.

As long as you pay off your balance before the end of the promotional period, you will not incur any finance charges in the form of interest. If you have a balance, you will only pay interest on that amount.

This contrasts with the deferred interest promotions some store credit cards and store finance offers offer. Usually, you won’t owe any interest if you refund the entire purchase before the promotion ends. If there is a balance, however, you will be charged interest based on the original purchase amount.

A 0% APR promotion is a great way to avoid interest. If you are making a balance transfer, however, Lewis-Parks recommends that you note the applicable balance transfer fees. “Understand how much you are adding to your balance to charge it to the 0% card,” she adds.

Finally, Philpot is warning consumers that these promotions may cause you to spend more than you normally would. If you think this could happen, you might be better off avoiding them.

Give up certain activities. Since many cards charge fees for balance transfers, cash advances, and overseas purchases, consider refraining from these activities or try to find a card that waives these fees.

Some balance transfer credit cards, for example, will waive the balance transfer fee for new cardholders for a short time. Additionally, many travel credit cards do not charge an overseas transaction fee.

If you use a credit card, understanding the costs associated with your account is essential. Since finance charges include interest and transaction fees, take the time to read the fine print about card fees and interest charges and when they come into play.

Once you get an idea of ​​the various finance charges that come with your card, you’ll be in a better position to know how to avoid them.