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Credit Card Basics: How to Read Your Credit Card Statement
By Eva Maria Norlyk
Many people new to credit cards find their monthly statement confusing. The back of the statement is usually filled with fine print written in a 27th grade language-as some people like to put it. Just as bad, the statement itself contains lots of abbreviations and confusing terms, which most new card users don’t necessarily know the meaning of. In short, if you are confused, you’re not alone. To help make your life easier, here is a guide to reading your credit card statement.
The most important part of your credit card statement is the Finance Charges section; checking this out each month will give you most of the information you need. Here is an overview of the terms you need to understand to read the Finance Charges section of your credit card statement:
Annual Percentage Rate (APR). This is the interest rate you pay on balances that remain on your card beyond the grace period (see below). In essence, the APR tells you how much you can expect to pay your card issuer in exchange for credit.
Most credit cards feature different APRs for different types of charges. When you look at the Finance Charges section, you likely see a purchase APR, a balance transfer APR (sometimes listed as “promo”), and a cash advance APR.
APRs can and do fluctuate, so keep an eye on this number. Any increase in APR will result in larger monthly payments and higher interest costs.
If you have outstanding balances at different levels of interest, card issuers apply payments to the balance with the lowest interest first. This keeps balances with a high interest rate on the card the longest, earning credit card companies a nice handsome sum in interest charges. However, once the new credit card provisions step into effect in 2010, card issuers will be required to pay off the balance with the highest interest charges first.
Average Daily Balance. Because card balances fluctuate a lot, card issuers apply interest on a daily basis. To do this, they calculate the average daily balance by adding the balance on the card for each day of the billing cycle and then dividing it by the total number of days in the cycle.
Daily Periodic Rate. In order to charge interest on the daily balance, card issuers need to know what the annual percentage rate (the APR) breaks into on a daily basis. This is referred to as the daily periodic rate, and it is calculated by dividing the APR by the number of days in a year. In other words, if your purchase APR is 12%, the daily periodic rate would be 12/365 or 0.03288%.
Periodic Finance Charge. The periodic finance charge is your total finance charge for that billing cycle. Notice that a different periodic finance charge will be listed for each type of APR, i.e. purchase, balance transfer, or cash advance APR. In other words, to see what your total finance charges are for the statement cycle, you need to add them all together. Your card statement usually does this for you in the Account Summary section of the Finance Charges.