Translating credit card statements
NEW YORK — They say one thing, but often mean another. It’s one reason credit card statements can slowly ensnare people into bigger debt loads. The mysterious stew of fine print on the back of bills doesn’t help clarify matters.
A law passed last month will bring some relief. Starting next year, credit card companies will need to make statements easier to read and spell out the price of carrying a balance.
For instance, companies will need to provide a table showing how much interest charges will cost if only minimum payments are made. Cardholders will also be shown how much they need to pay each month to deplete a balance within three years.
What the law won’t do is wipe statements clean of misleading or confusing terms. The details of just how banks will implement the changes by February aren’t yet clear either.
So until then, here’s a guide to decoding what your credit card statement really means.
AVAILABLE CREDIT
There are two reasons why the term "available credit" is misleading.
The first is that card companies don’t have to stop you from exceeding your credit limit. But they will slam you with a fee for doing so.
Nearly all cards have over-the-limit fees, with the average being about $29, according to Consumer Action, an advocacy group based in Washington. One provision of the new credit card law is that card holders will have to elect the option to make charges beyond their limits.
The second reason the term is misleading is that a transaction can be denied before your so-called available credit is used up. This might happen if your spending habits are deemed risky or out of character.
A common mistake is confusing your available credit with your cash advance credit line. The two should be listed separately, with the latter coming with a significantly higher interest rate.
AVERAGE DAILY BALANCE
It’s easy to dismiss this figure, because its purpose isn’t immediately clear. The bottom line: It’s an amount used to calculate finance charges business card templates.
To determine your interest charge, the card company starts with the average daily balance — which is your balance at the end of each day during a billing period, divided by the number of days in the period.
That number is then multiplied by a monthly period rate, which is the annual interest rate divided by 12. This determines your financing charges for a given billing period.
In some cases, banks use daily periodic rates, meaning they divide the annual interest rate by 365. The rates should be listed under a heading such as "Finance Charge Schedule."
So what does that mean for you? Paying off bills early — even before the due date — would lower your average daily balance and subsequently your financing charges.
DUE DATE
Even if you mail your payment so it arrives by the due date, don’t be surprised if you’re slapped with a late fee.
One reason is that deadlines can be for a specific time, sometimes as early as 1 p.m. So if your payment isn’t processed until later in the afternoon — boom — late fee. The time that your payment is due is usually buried somewhere in the terms on the back of your bill.
The new law will push due date deadlines back to 5 p.m. and require that they don’t fall on a holiday or weekend.
RESIDUAL INTEREST
Let’s say you pay off a $1,000 balance. But the next month, you get a bill for interest charges on that $1,000. This is called residual interest.
What’s happening is that interest continues accruing on debt in that window of time between when your statement was issued and when you make your payment. By the time you get your statement and submit the payment, you’ve racked up more interest.