There is a price for borrowing money. Aside from the annual membership fee, one of the most important things that you should consider is the interest. This is how the credit card issuer earns money. Understanding the different credits and debits that go in and out of your credit card statement is one of the skills that you need to be able to use your card wisely. Don’t just swipe, understand how your credit card works.
9. Interest Rate
The interest rate is the cost of borrowing money. The interest is applied only to your balance. Different cards have different interest rates. They are also calculated in different ways. Some credit cards issuers calculate it based on your average daily balance. Some use the balance on the beginning or the end of the cycle. You will need to read the fine print to understand how your credit card company calculates the interest. In the Philippines, the average interest rate is 3.5% per month. That’s 42% per annum.
Tip: You can avoid paying interests by paying the total amount due on each billing cycle.
10. Cash Advance Interest Rate
Aside from the cash advance fee, there is a separate interest for your cash advances. This is typically higher than the interest rate of your regular purchases.
Tip: Cash advance interest rate is not only higher, it is also automatically charged as soon as you withdraw the cash. Avoid this by using the cash advance feature of your credit card only when absolutely necessary.
11. Previous Balance
The previous balance pertains to your outstanding balance from the previous month’s statement. If you see this in your credit card statement, this means that the interest is calculated based on the amount owed at the end of the beginning of the billing cycle.
For example if you have a 5,000 outstanding balance from the previous billing and you paid 4,000 last month. You will then have 1,000 balance at the end of the beginning of the current month cycle. This means the interest will be calculated on the 1,000 balance only.
Tip: Always make it a point to have zero balance at the end of the beginning of the billing cycle so you don’t need to pay any interest.
12. Purchases and Advances
This pertains to all your credit card purchases and cash advances that falls within the billing cycle. The billing cycle is the period after the statement date from the previous month to the statement date of the current month.
Tip: Make sure to keep all your credit card receipts so you can verify the transactions in your credit card statement to avoid paying for double entries or purchases that you did not do.
Credits are any amount that the card company owes you. It could be price of something that you returned that you originally purchased using your credit card. It could be wrong entries or items that you did not actually purchase. It could also be credit card points that you redeemed in exchange for cash credits.
Tip: Be consciously aware of your purchases and if you are expecting credits into your account. Ensure that the correct amount has been credited.
Payments are the amount of money that you pay the credit card for your purchases. Any payment you made will reduce your outstanding balance.
Tip: Monitor all payments that you made to make sure that they are properly credited to your account.
15. Interest Charge
This is the total amount of all the interests that were charged to your account. It is the sum total of the interests on purchases, cash advances and balance transfer.
Tip: Although you can avoid paying interests on purchases if you pay within the grace period, you cannot do the same with cash advances and balance transfers because they are automatically charged right after the transaction.
16. Late Charge
These are charges incurred for payments received after the due date.
Tip: Avoid paying late charges by paying your dues on or before the payment due date.