How to Reduce Credit Card Finance Charges

by Jill Kane

There are a few simple ways to keep credit card costs at a minimum. Following these steps can save you hundreds of dollars in credit card fees and interest. Most credit cards offer a grace period which is a period of time allowed to pay your bill without being charged interest. Grace periods are usually about 25 days. Be sure to pay your bill in full each month by the due date to avoid interest charges. If you carry a balance over to the next month, you will lose the grace period benefit on new purchases. Some credit cards do not have a grace period, which means that interest begins to accrue as soon as the purchase is made, and there is no way to avoid interest charges.

Cash advances are loans against your line of credit by obtaining cash with your credit card at an ATM or utilizing checks provided with your account. Most credit cards charge a fee based on a percent of the amount borrowed, usually 2 – 3%. Most credit cards don’t have a grace period and charge higher interest rates on cash advances. So, be cautious when using the cash advance feature on your credit card and only use it for real emergencies.

Other fees can be costly if ignored. Late fees are frequently a set amount, such as $10 - $15, or a percentage of the minimum amount due. Allow a few extra days for your payment to arrive and be credited to your account. Over-credit limit fees, annual fees and lost and replacement fees are other fees to be cognizant of, as well. These additional fees can easily cost you hundreds of dollars if ignored. So, be sure to send your payment on time and keep track of the amount of credit you have available.

Lastly, request a lower interest rate. Frequently, if you have good credit, your credit card lender will offer you a better rate if requested. If this does not work, then search for a lower interest card and transfer your balance. This last tip is more important if you carry a balance. The best option however, is to pay your bill in full each month.

Interest: Average Daily Balance vs Two-Cycle Billing – by Jill Kane

The “average daily balance” is the most commonly used method to calculate interest for credit card accounts.

Average Daily Balance
How it works –

Each day, the bank adds your payments and charges to compute a daily balance. They add these totals and divide that by the number of days in the month. This determines the average daily balance.

The bank will then compute the “monthly periodic interest rate” by dividing the annual interest rate by 12 (number of months per year).

The average daily balance is multiplied by the monthly periodic interest rate to determine the finance charge for the month.

Two-Cycle Billing Method

Some banks use the “two-cycle billing method” which will eliminate your grace period if you don’t pay your balance in full each month. Your finance charge is figured on the average daily balance of both the current and the previous month. The first month you don’t pay your balance in full is the only time you are charged for two months.

This summary of billing methods proves the importance in knowing how your bank calculates your finance charges.

Secured credit cards can help repair or build your credit.

A deposit into a savings account is required to obtain a secured credit card. The money placed in this account may be used to cover charges if needed. Secured cards can be used just like an unsecured card.

The majority of secured cards will allow a credit line of the amount deposited. Some, however, will only allow a portion of the deposited amount, while a few will actually offer credit lines of double the deposited amount.

Some secured cards are easy to obtain if you can deposit the required funds; others have more stringent rules regarding income and credit history. Most importantly, once obtaining your secured credit card, use it to make purchases and make all payments on time. Getting the card and not using it will not help your credit.

After six months to one year of using your secured card properly, you should be able to move up to an unsecured credit card. This process will help build or rebuild your credit.