Annual Percentage (APR)
The Annual Percentage Rate is the rate of interest a consumer is charged over the time period of one year. This is then broken down into monthly amounts and added onto the existing balance of an account. There are several types of interest that can be applied and several methods that it may be calculated by.
Simple Interest
Interest paid only on the original principal, not on the interest accrued. This means that out of each months payment a fixed amount will be applied towards finance charges and a fixed amount will be applied towards principle.
Compound Interest
Interest computed on the accumulated unpaid interest as well as on the original principal. Each month the finance charge will vary depending on the existing balance and the amount paid in the previous month.
There are three main methods of calculating monthly finance charges.
Average Daily Balance
This method, which is the most commonly used, works as follows: The company tracks your balance each day, adding any charges and subtracting payments as they occur. At the end of the billing cycle, they compute the average of these daily totals and then multiply this number by the monthly interest rate to calculate your finance charge.
Adjusted Balance
This system, which consumer experts say favors the cardholder, takes the balance from your previous statement, adds new charges, subtracts the payment you made and then multiplies this number by the monthly interest rate.
Previous Balance
According to consumer experts this method generally favors the card issuer. The credit grantor multiplies your previous statement’s balance by the monthly interest rate to find the new finance charge. This means you’re still being charged interest on your balance even after you’ve made payments towards it.
Also included in the monthly finance charges would be fees that are charged by credit grantors on the credit that they have extended. These would include but are not limited to;
Late fees
Are charged whenever a payment is not received by the due date and may range from $10.00 to as much as $35.00.
Over limit fees
Which are charged whenever the balance on the account exceeds the initial credit limit. These typically range at $29.00 per month.
Past due fees
Are charged whenever there is an amount that was not paid from the previous months billing cycle. These also typically range at $10.000 to $29.00 per month.
Transaction fees
Are applied any time a transaction is made with the account, these could range from $1.50 to $5.00, just for using the card.
ATM charges
Are typically only a few dollars, but it’s just to get access to your money.
Cash advance fees
Will be applied if cash is taken in place of a purchase and typically will carry a higher APR on that portion of the balance.
