Your CREDIT Questions and Answers: Start here to get a handle on FREE Credit Scores and Credit Reports, Credit Card Fees and Finance Charges and How Your Credit Card Balance is calculated.
What’s My Credit Score? My Credit Report and My Credit Score
Where can I get a FREE Credit Report?
A credit report (or credit file disclosure), lists all the information in your credit file maintained by a consumer reporting company that is provided when a third party, such as a lender, makes a request. Your credit report contains information about where you live, how you pay your bills, if you’ve been sued or arrested, or if have filed for bankruptcy.
Annualcreditreport.com is the only site that provides a truly free credit report site without gimmicks, so-called “free” trials, membership fees or upsell tactics. You can fill in the secure form online, print out the form and mail it in, or call the toll-free number. This site is the only credit report site that is authorized by the Federal Trade Commission (FTC), and it uses standard security precautions including CAPTCHA technology, secure https and Verisign® certification.
Under federal law and the laws of several states, you are entitled to a free credit report from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion – once every twelve months. You’re also entitled to one free report a year if you’re unemployed and plan to look for a job within 60 days, if you’re on welfare, or if your report is inaccurate because of fraud, including identity theft.
How do I correct or dispute on my Credit Report?
Contact the nationwide consumer credit reporting company that provided the credit report:
What is my Credit Score? Where can I get my Credit Score for FREE?
A free credit report from annualcreditreport.com does not include your credit score.
See this post, Yes, Virginia, there is such a thing as a free credit score for sites where you can get a truly free credit score.
My Fees and Finance Charges
What is a Cash Advance Fee?
A cash advance fee is what the credit card issuer charges you for borrowing money using your credit card. This fee is stated in your Terms and Conditions as a flat per-transaction fee or a percentage of the amount of the cash advance. If it is a percentage, it is usually about 3% – 5% of the amount you are borrowing. Cash advances can be usually made at many ATMs or sometimes can be delivered by a messenger service.
Depending on the credit card company issuing the card, the cash advance fee may be deducted directly from the cash advance at the time the money is received or it may be posted to your bill on the day you received the advance. The cost of a cash advance is very high not only because of the high cash advance fee but also because there is no grace period on the money you borrowed – interest starts adding up from the moment the money is withdrawn.
A cash advance also carries with it a high-interest cash advance APR that usually starts accruing the day you make the cash advance – so beware. Note that this APR is not a part of the cash advance fee, but it is a part of your overall cost.
EXAMPLE: The cash advance fee is listed as “2%/$10.” This means that the cash advance fee will be either 2% of the cash advance amount or $10, whichever is MORE.
CONSUMER TIP: Since credit card payments are applied to the low-interest balances FIRST (so interest keeps building on the high-interest cash advance balance), be sure to pay down all lower-interest APR balances right away so that you can start applying your payments directly toward your cash advance debt. Always consider your alternatives to getting a cash advance since it is truly a last resort.
How is my Finance Charge calculated?
Using the Average Daily Balance:
Daily – Average Daily Balance x Daily Periodic Rate x Days in the Cycle = Monthly Finance Charge
Or Monthly – Average Daily Balance x Monthly Periodic Rate = Monthly Finance Charge
EXAMPLE: If you charged $100 on June 1st, and $300 on June 15th, your Average Daily Balance for the month would be $200. If your APR is 18%, your monthly periodic rate is 1.5% (18/12). If you do not pay off the balance, you would have a monthly finance charge of $3.00.
My APR: The Many Different Flavors
Credit Card 101: What is an APR?
The Annual Percentage Rate (APR) is the cost you pay for borrowing money using your credit card – i.e., carrying a balance on your credit card. This cost is calculated as a percentage of the amount you borrow, expressed annually. For example, an APR of 18% means that the cost of borrowing $1,000 dollars is $180 for one year. If you carry a large balance from month to month, even a small difference in the APR can make a big difference in how much you will pay over a year.
To calculate your finance charge or interest each month, credit card companies use the APR and a monthly or daily rate (a “periodic rate”). Let’s say your account balance is $200 and your APR is 18%.
To calculate the monthly finance charge using a Monthly Periodic Rate, multiply the Average Daily Balance by the Monthly Periodic Rate.
EXAMPLE: 18% divided by 12 = 1.5% and $200 x 1.5% = $3.00
To calculate the monthly finance charge using a Daily Periodic Rate, divide the APR by the number of days in the year (365), then multiply the result by the number of days in the billing cycle.
EXAMPLE: 18% divided by 365 = .0005 (or .05%) and .05% x 30 = 1.5% and $200 x 1.5% = $3.00
Many credit cards offer one APR for purchases and a different (often higher) one for balance transfers or cash advances. APRs come in many different flavors, and can be tiered depending on the level of your balance (“17% on balances above $500“) and can increase if your payments are late (a penalty rate or Default APR).
Credit card companies are required to disclose the APR before your credit application is finalized. They are also required to publish the APR on your credit card statement each month. Make sure you check the rate on the regular basis, since the APR can change often, even when it is defined as a fixed (not variable) APR.
What is Deferred Interest?
Deferred interest is when you receive a LOW or even 0% intro rate–but only for a very limited period of time. IF you don’t pay the FULL amount within that time, you’ll be charged retroactive interest. Store credit cards often charge this, so beware.
What is a Default APR?
A Default APR (or “Penalty Rate” or “Penalty APR”) is used in certain cases if you fail to pay at least the minimum payment due on your credit card account, exceed your credit line, your payment is received late, or your payment is not honored by your bank. The Default APR is considerably higher than any of the other APRs for your account.
Example: Typically, the Default APR is based on the Prime Rate and is described like this in the Terms and Conditions: “The Prime Rate plus 23.74% (currently 31.99%) and may vary.”
In most cases, the Default APR takes effect the first day of the billing cycle in which you default and once you are in the “penalty box,” the credit card company can charge you the Default APR indefinitely. The maximum default APR that a credit card company can charge you is limited by federal and state laws to a current whopping 35%.
Due to a small clause known as the Universal Default Clause, credit card companies can charge you the Default APR if you “default in the performance of any of your obligations in connection with any other account” or “fail to honor any other obligation” – in other words, if you don’t pay credit card #1 on time, credit card #2 can charge you their Default APR if they use this clause.
Thanks to the passage of the recent Credit Card bill, the Universal Default Clause will be put to its rightful end in Feb 2010. Please be careful before then, and watch that you pay all your accounts on time, or you may see all your credit card rates go sky-high.
What is the difference between a Variable APR and a Fixed APR?
In the Terms and Conditions of every credit card you own, you will see that the APR is either fixed or variable. The type of APR determines how your interest rate will change on the money you are borrowing.
A Variable APR means that the APR changes according to an economic variable or index such as the Prime Rate or the LIBOR Rate. Your APR is set by adding a “margin” to the variable or index.
EXAMPLE: Your card has a Variable APR based on the Prime Rate, and it is calculated as the Prime Rate plus 8%. If the Prime Rate is 9%, then your APR is 17% (9% + 8% = 17%). If the Prime Rate goes up to 11%, the APR on your account would go up to 19% (11% + 8% = 19%).
A Fixed APR means that the APR is not linked to any economic variable, but it does not mean that it will remain the same over time. Rates can change for cards with a fixed APR, and the credit card company reserves the right to change it after giving you proper written notice (15 days under federal law).
If you carry a balance, and the Prime Rate is trending up, you would do better with a credit card that has Fixed APR, but only if the credit card company does not raise the Fixed APR.
Calculating My Credit Card Balance
How is my Credit Card Balance calculated?
The most common methods of calculating your credit card balance are:
* Average Daily Balance – Each day’s balance / total number of days in billing cycle
* Two-Cycle Average Daily Balance – Average Daily Balance over last two billing cycles
* Previous Balance – Outstanding balance carried over from previous billing cycle
* Adjusted Balance – Balance is adjusted for additional purchases and payments
CONSUMER ALERT: How your balance is calculated has a huge effect on how high your finance charge will be.
Balance methods are rated below ( is worst for you, is best for you).
Average Daily Balance
—Each day’s balance divided by number of days in billing cycle
This method is the most common one used by credit card issuers, but it is not the cheapest for you (see the Adjusted Balance). The Average Daily Balance is calculated by adding each day’s balance (including new charges, payments and credits) and dividing that total by the number of days in a billing cycle.
Two-Cycle Average Daily Balance
–Average Daily Balance for CURRENT billing cycle + Average Daily Balance for PREVIOUS billing cycle are combined
The finance charge is the sum of BOTH billing cycle balances multiplied by the monthly periodic rate. This generally results in the MOST expensive finance charge! Read your credit card’s Terms and Conditions carefully and if this is the method used to compute your balance, try to pay off any unpaid balances as soon as you can to avoid a very high finance charge.
–Payments received during the current billing cycle are NOT subtracted from the balance
–Additional charges are NOT added to the balance
In this hybrid method (based on the balance at the opening of the billing cycle), current payments (which would lower the balance) are not included in the calculation, but additional charges during the billing cycle aren’t added either.This method generally results in a LOWER finance charge than either the Average Daily Balance or the Two-Cycle Average Daily Balance, but a HIGHER finance charge than the Adjusted Balance method.
–Additional purchases during the current billing period are NOT added to the balance
–Payments and credits for the current billing cycle ARE subtracted from the balance
New purchases are not included (which would raise the balance) and payments are included (which lowers the balance). This method generally results in the LEAST expensive finance charge.
What is a Balance Transfer?
A balance transfer is the process of moving an unpaid credit card balance to another credit card, usually to take advantage of a lower interest rate. There is nothing wrong with doing this; credit card companies often encourage it. They get a new customer (you) and you get a nice low rate – for a while.
Win-Win? Possibly, but be VERY careful! If you can plan ahead and pay off the debt before the great low rate ends, you win. If you carry a balance – even a little one – you lose, because often you will get saddled with a new and very high APR; maybe worse than the one you started with.
Should I do a 0% Balance Transfer?
Be sure to ask these 4 questions BEFORE you sign:
1) How much are the transfer fees and charges? 3% is common. Depending on your debt amount, it might be better to go with a flat fee – usually less than $100. Make sure you know the costs. They can often be quite high, and might wipe out a considerable amount of what you are saving by moving to the new credit card.
2) When does this great deal expire? Then what? The good transfer deal does not go on indefinitely. Mark it on your calendar and know the cost of the credit after that date, in case you don’t pay it off before.
3) Do I need to use this card for new purchases? Don’t transfer the balance if you need to use the card. Additional purchases are at different and much higher rate. When you make monthly payments, the lower rate balance is paid first. The higher rate balance isn’t even touched until the lower rate balance is paid off.
4) Do I pay on time? If you don’t pay the bill on time even once, you are opening yourself up to a very different rate scenario.
Often, credit card companies offer teaser rates, or introductory rates as ways to bring new credit customers in. An introductory APR is often quite low or even 0% on a good balance transfer credit card. If it all sounds too good to be true, it might be. You are limited to the amount of available credit on the balance transfer card, and the credit card company decides just how much that amount will be.
GET INFORMED! The more you know, the less likely you will be stuck with a bum deal.
What is a Grace Period?
The Grace Period is the length of time a credit card issuer gives you before triggering a finance charge. It is usually between 20-30 days. Most (but not all) credit cards extend a grace period to customers who pay off their balances each month, but they generally do not offer it if you carry a balance on your credit card. If you do carry a balance, or your credit card does not offer a grace period, finance charges start accruing the moment you make a purchase or from the date each transaction is posted to your account.
Types of Grace Periods
Full – you have a grace period for new purchases, whether or not you paid off your balance in full the previous month
Typical – you pay interest on all new purchases immediately, unless you have paid your previous month’s bill in full
Remember, if your credit card does not offer any kind of grace period, you will always pay interest immediately on new purchases, whether or not you have paid your bill in full the previous month.
How Can I Tell Which Grace Period I Have?
Look for the balance calculation method on the back of your credit card statement. A card with a typical grace period INCLUDES new purchases in its Average Daily Balance when calculating your balance; a card with a full grace period EXCLUDES new purchases from the Average Daily Balance.
Photo by Stacy Olivier on Unsplash