Interest charges

Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).

The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

Do you have a nagging balance on one of your credit cards? Did you know you can pay it off, and save hundreds of dollars at the same time? A balance transfer credit card will help you do just that. This type of card lets you bring over an existing balance or loan and pay it off at a lower interest rate. Here’s how to get the most out of a balance transfer credit card.

Transfer the Balance

Before applying for a balance transfer card, you’ll want to check out your options. First look at the fees involved, as these may vary from card to card. Many companies charge a certain amount to bring over an existing balance. The usual rate is around 3 percent of the total amount, and some cards include a cap of $50 or $75. In most cases, the money you save in interest will outweigh the cost of transferring.

Also compare the interest rates. Balance transfer cards usually come with a 0% APR period. This means that you will have a certain time, usually between six and twelve months, during which you will not be charged any interest. You can use this time to pay off the balance.

Get the Most from it

Once you’ve found the best balance transfer card to apply for, it’s time to pay off the debt. Ideally, you will want to pay it off within the initial zero percent interest timeframe. Say you transfer a balance of $2,400 and you have twelve months of 0% APR. All you need to do is put $200 toward the debt each month for twelve months. Pay that amount at the beginning of each month, or every time you receive a paycheck.

Think about it: if you pay off the $2,400 balance on the card within a year, you will save hundreds of dollars. If your previous card charged 18% APR, and you carried the balance for a year, you would have to pay $432 in interest! That is a significant savings.

If it becomes difficult to pay $200 each month, reduce the amount you pay to $150. Then keep paying that amount until the entire balance is paid off.

Use the Card

Many experts recommend paying off credit card debt before using a new card. This rule of thumb applies to balance transfer credit cards too. Some cards are set up so that if you make new purchases, the amount you pay each month will first be applied to those, and then to the transferred balance. This can make it hard to pay off the balance in its entirety. To avoid problems, don’t use your new credit card right away. Put it in a drawer until you have paid off the balance.

Once the debt is paid off, you can begin using the card. Many balance transfer cards come with additional perks such as rewards programs or cash back options. So when you start shopping with the card, you will receive even more benefits. Try to pay off the amount on the card each month to avoid interest charges and late fees.

A balance transfer credit card can help straighten out your finances. Apply online for one today and you’ll notice the difference right away. Soon you’ll be debt-free, thanks to your credit card.