How credit cards works with Monthly Payments and Finance Charges

Very few credit cards such as American Express require you to pay off all of your charges each and every month. Usually have no finance charge and mostly no maximum limit.

Most cards including Visa, MasterCard, Discover and some others offer what is known as revolving credit. This means they let you carry a balance on which they charge interest and they require you to make a minimum payment. The minimum payment is usually about 5 to 10 percent of your current balance

The method used by financial institutions to calculate finance charges

Adjusted balance: Adjusted balance which consumer experts say favors to cardholder takes the balance from your previous statement and adds new charges, subtracts the payment you made and then multiplies this number by the monthly interest rate.

Average daily balance: Average daily balance which is a perfect just one and the most commonly used, works like this: card issuer monitor your balance day-by-day adding charges and subtracting payments as they occur. At the end of the period they compute the average of these daily totals and then multiply this number by the monthly interest rate to find your finance charge.

Previous balance: Previous balance generally favors the card issuer according to consumer individuals. Card issuer multiplies your previous statement’s balance by the monthly interest rate to find the new finance charge. This means you’re still being charged interest on your balance a whole period after you have paid it off.

Whatever you pay will depart depending on your balance and interest rate and the way your finance charge is calculated. Some example that shows how much difference the interest rate can make in what you actually end up paying:

Late fees and over the limit fees are a couple of newer charges that are used by most credit card banks. Most card issuers are forcefully raising interest rates after a set number of late payments once you have a few of late payments the creditcard company can charge you the ballooned interest rate for the remaining time of the account. Most credit card issuer report your payment record to credit bureau and even a few late payments could cause you problems when you try to buy a car or a house.