What Credit Card is the Right Fit for you?

Over the past couple of months, you have most likely been receiving a number of credit card offers in the mail. Some are offering you 0% interest for the first 6 months, no finance charges on balance transfers, or an introductory rate “as low as” 6%. You have even probably thought to yourself, “Wow, this is a really great deal!” Let’s put the mail down for a second and take a look at these offers and also a look at what offer is going to be the best for you.

When you are choosing a credit card, there are a number of factors to take into consideration, the most important, is this card right for me. We all have different goals or ideas in terms of what we want our card to do for us. Will you be paying the card off monthly, carry a balance, use it for cash advances, or transfer a balance form an existing card?

After we decide what our purpose of the card is, we can start looking at some of the finer details that may make or break our decision. What sort of charges come with balance transfers? What sort of annual fees are tied to the card if I do not use it? What is the interest rate going to be after the grace period, if one applies, and will this rate be fixed or variable?

Let us begin our credit card series by taking a look at how companies actually figure your finance charges. There are four main equations that companies will use in figuring out what your monthly payments will be on a monthly basis; Average Daily Balance, Daily Balance, Two Cycle Balance, and Previous Balance. Let us take a look at each of these individually:

Average Daily Balance: In this formula, the creditor will average your daily balance. For instance, if you charge $200.00 on the first day of January and $300.00 on the 16th, your average daily balance would be $250.00. That number times roughly 1/12th of your annual percentage rate (APR), equals your monthly finance charge. Interest may be calculated on a daily or monthly basis.

Daily Balance: This formula is the most commonly used formula by creditors. In this, the company calculates the actual balance you carried each day of your billing cycle, subtracting payments or refunds. They then multiply this figure by roughly 1/365th of you APR and add it together for each day.

Two Cycle Balance: This is very similar to the Daily Balance formula except that the daily average is based on your last two billing months, not just one. You need to be careful with this method, because if you don’t pay your card off in full each month, you’ll be hit with retroactive interest on your next bill.

Previous Balance: The billing cycle will show beginning balance and ending balance for your account. The finance charge is based on the outstanding balance at the start of the billing cycle.

Now that we have looked at some of the calculation methods, join us next week as we look at some of the fine print on some of these offers you may have received.