Credit Card Costs

Credit Card Costs

Credit card costs can make revolving credit one of the most expensive types of consumer loans available today or the can make them one of the cheapest forms of credit. Low interest no and low fee cards are available, but they can be harder to find and qualify for. You must make sure you understand the terms and fees to avoid costly surprises.

In past times credit card companies would just send you the card and all you had to do was call to activate it with card in hand. Many times this led to consumers paying more that they expected if fees and interest rates. They still have pre-approved offers if you have not opted out of them with the three credit agencies. Now they send you a letter or a promotional fake credit card and you must respond and wait to get the real card in the mail.

There are several features to look at when you are shopping for a credit card: finance charges, annual fees, grace periods, over limit fees, late fees, and balance calculation methods. Let's take a look at what each of these terms means and how they affect the total cost of the credit card you choose. Next let's talk about how you can save money by choosing the cards that best fit your personal financial needs.

Credit Card Finance Charges

Finance charges are the interest and fees you pay financial institution, the cost of credit. Many credit card holders don't pay their credit card bills off each month, the carry balances and make payments. If you pay your new balance if full each month you will not have to pay interest, in most cases.

There are two ways finance charges are listed on your credit card statement: annual percentage rate or APR and monthly periodic rate. The APR is the total cost of the credit, interest plus fees expressed as a yearly interest rate. The monthly periodic rate is the amount of interest stated as a monthly percentage. For example if you are paying a yearly interest rate of 12% then your monthly rate would be 1%.

If your credit card balance is $10,000 and you are paying 1% per month then your interest charge for that month would be $100. If your minimum payment is billed at 1.5% then you would only be reducing your balance by $50 per month.

Annual Fees

Annual Fees or card membership fees can range from zero to several hundred dollars per year. If you are paying credit card membership fees on more than one card they can add up. There are cards with no annual fees ever. Beware of cards that offer no membership for the first year only. Credit card companies make money from their carrying a balance and paying interest. The credit card companies also make money from fees charged to the merchant's for being able to accept credit cards. 

The credit card issuers must warn you of the annual fee renewal 30 days in advance of it being charged to your account each year. This notice will appear on your billing statement. The notice must also include instructions explaining how you can cancel the account if you no longer want to pay the annual fee. 

Grace Periods

The grace period it the time you have to pay each month's charges off prior to being charged interest. 

Grace periods can be confusing since they vary between credit card issuers. The most important thing to remember is to make sure you pay the current months charges prior to the due date to avoid interest on those charges.