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Borrowing Has Costs

Credit card and money bag

For many years, credit card users were left in the dark about all the fine print in their credit card agreements. Reforms and regulations such as the 2009 Credit CARD Act, also known as the “Credit Cardholders’ Bill of Rights,” now provide some protection to credit cardholders, but it’s still important to understand the basics of the fine print in your credit card agreement.

Interest:

Interest is what you pay for the privilege of using someone else’s money. Interest can be as much as 25-30 percent on some credit cards. 

Fees:

Some credit card companies, banks and department store or big box store credit card issuers charge annual fees as well as fees for late payments. You can avoid late fees by making on-time payments, but annual fees must be paid each year whether you use the card or not.

Finance Charges:

Finance charges include all interest and fees added together and is expressed as an annual percentage rate (APR).

How Do You Figure Your Interest?

Calculator 

The Annual Percentage Rate (APR) is a yearly figure, but you’re not charged interest on a yearly basis. You actually get charged interest on a daily basis. The company offering you credit is legally obligated to disclose the APR. Here’s how you can calculate it:

Divide the APR by 360 or 365 (look at your agreement for the number of days). This is the periodic interest rate that will compound every day. Keep in mind that interest builds on itself — that’s why it’s called “compound” interest. Each time the interest is calculated as a percentage of the total, that added interest becomes part of the new total for the next time the interest is calculated.


Credit Card Definitions

Before you sign up for a credit card, be sure to compare the APR charged by several companies and know the terms of the agreement. The Consumer Financial Protection Bureau has a thorough list of credit card contract definitions

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