When I paid off (well, transferred) the balance from my Bank of America account the other day, my elation did not last long.
You see, I’ve been burned before. A month after paying the balance on a card, I’ve received a statement with additional charges, usually accrued interest.
We all know the credit card companies are evil (and I don’t just say this because I am in debt – that’s all me – but they ARE). However, it’s hard to find the confidence to call them up and argue a charge when you don’t even know how it’s been calculated.
So, I decided to finally find out.
Lesson No. 1 – You Have To Read Your Terms
I didn’t want to hear this either. I’ve always just browsed through lender terms, checking on fees and when a teaser rate will expire. I’ve never paid much attention to how finance charges are calculated, because I’ve never paid off balances monthly.
Reading through my B of A terms, this is what I found out:
- There is no Grace Period for Balance Transfers & Cash Advances (my balance is made up entirely of a balance transfer).
- The Average Daily Balance Method is used to calculate finance charges.
Of course, none of this made sense to me, even after researching on-line for 30 minutes. So, I decided to call B of A and ask.
After explaining that I paid of my balance on the 22nd of January and my next payment is not due until February 2nd, I asked if I would be seeing another finance charge.
“Yes, you will get another statement with a finance charge.”
“Would you mind just quickly explaining why that is?”
“Because from the end of your last billing cycle, which was January 15th, through the time you paid off the balance on January 22nd, you will have accumulated interest charges.”
This made sense. B of A uses the average daily balance method, so for 8 days I will have accrued some interest.
She did offer a tip; if you’re going to pay of your balance, give your creditor a call and they can calculate what you will owe in total.
According to The Motley Fool, most credit card issuers use the Average Daily Balance Method, so this is something to keep in mind.
Lesson No. 2 – Watch For Double-Cycle Billing
This method will fuck you if you carry a balance. The Average Daily Balance Method is used, but your previous balance will also be considered (and be subject to charges).
Lesson No. 3 – Remember, Creditors Can Raise Your Interest Rate Without Notice
I learned this the hard way. One slightly late payment and my interest rate shot up nearly 20 points. Following are other reasons your rate may increase:
- Carrying too large of a balance on another credit card: Your creditor may look at your credit records every quarter to evaluate the amount of debt relative to the amount of your current income. One notice received by a Fool staffer stated that customers could not increase “significantly” the amount they spent on another unsecured card. It defined “significant” as $2,000 or more. Keep your eye on your rates if you plan to make any big purchases.
- Your bill-paying habits: Even if you aren’t taking advantage of a teaser rate, you could be subject to a penalty rate of up to 32% by missing a few payments or paying late for a number of months.
- Defaulting on a loan — any loan: If your lender sees you pay late or default on another loan, he can re-price your credit card account so that he won’t lose his money, too.
- Nothing at all: Your lender has every right to raise your interest rate. Even the most attractive interest rate offers — even ones that are fixed or fixed-for-life — can go by the wayside. Lenders are legally required to give you just 15 days’ notice of a rate change, however, most will give you 30 days’ notice.
The last point being the most important in this climate. I’ve known many, many people who have seen their rates shoot up without notice. And these are people with excellent credit who pay their balance in full every month.
Want to do some additional research? Try the following sites:
- The Motley Fool Credit Center
- Financial Web: Credit Cards
- Street Authority’s Financial Glossary
- About Dot Com: Credit/Debt Management
- The Federal Reserve Board: Choosing A Credit Card