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It can be difficult to understand how your monthly credit card statements are
calculated and how the credit card companies calculate your monthly minimums.
Many banks that issue credit cards lure consumers in with low introductory
rates that suddenly escalate to incredible levels after an initial trial period
ends. Furthermore, there are numerous other fees to consider including: annual
membership fees, finances charges, late fees, over the limit fees, and other
penalties. Lastly, interest rates can fluctuate creating more confusion. If you
have one or more credit cards, with different fees and varying interest rates
it can be almost impossible to plan out a monthly budget for yourself based on
what the monthly minimum payments will be. Actually there is a mathematical
formula used by financial institutions to determine what your monthly minimum
payment will be.
Depending on the method your bank uses, you will either make a payment based on
your average daily balance, your balance based on adjusted payments, charges
and interest rates or your previous balance. These methods may favor either the
card holder, the card issuer or maintain a fair balance between the two.
Whether you are applying for a new card, consolidating your balances, or simply
trying to figure out how much you’re supposed to pay every month, it is wise to
read the small print on your card member statement to see which method that
bank utilizes.
The method most beneficial to the consumer or cardholder is the adjusted
balance system. With this simple formula the bank will add any new charges to
your previous monthly balance, subtract payments and then take that sum and
multiply it by the monthly interest charge. The monthly interest charge is
essentially your interest rate divided by 12. So, if you have a 24% interest
rate, your monthly interest charge is 2%. The resulting total is the minimum
amount you will be required to pay that month.
Conversely, the system that favors the bank or card issuer is known as the
previous balance system. With this method the financial institution will
multiply the balance from the previous month by the monthly interest payment,
regardless of any payments you have since made. This means that even if you
have made a large payment that month, you will still be penalized for the
previous month’s balance.
The formula that appears to run down the middle is known as the average daily
balance method. Your average daily balance (monthly balance divided by average
days in the month) is added to any accrued charges as they occur. Any payments
that are made are subtracted. Then, the average of each daily total is
calculated and the resulting sum is multiplied by the monthly interest rate.
Now factor in late fees, over-the-limit fees and annual membership rates and
it’s even more difficult to calculate a budget around monthly credit card
payments.
It is extremely important that you review every charge on your credit card
statement and calculate the minimum monthly payment due before sending in the
payment. Never take the word of the issuing bank that this is the amount of
money that you owe. While the charges on the statement are typically correct,
there still can be a mistake. In the case of an error, either on charges made
or in the amount of your minimum payment, you normally have a limited amount of
time to appeal. After that time elapses, you will probably be stuck paying the
money, whether you owe it or not. Most banks allow 60 days to dispute a charge
or error and must provide you with a reply within 30 days. If the result of the
investigation determines an error has been made, you will typically receive a
credit on your statement. If the investigation reveals no mistake, you will be
responsible for paying the bill. If you do not understand something on your
statement, call customer service and ask them to explain it. Understanding the
billing system or formula of your credit card company and how they calculate
your bills, can assist you in keeping future charges down and maintaining your
monthly budget.
If you do have too much credit card debt and are having difficulty paying even
the monthly minimums, you should contact The Debt Reduction Group for a free
debt consultation. We can help you reduce your debt balances by 40-60% and
potentially have you debt free in as little as 12 months. You can call The Debt
Reduction Group toll-free at 888-443-DEBT. Click here for a free consultation.
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