Thursday, 23 May 2013

Interest Charges on Credit Cards Transactions






















Posted by blogger Amy Lewis :) 


Credit cards acts as a boon for people when they need urgent financial support. However, it has two facets and the weird side of it is that those card issuers charge heavy interest rates and are strict with their policies. Every card owner must therefore be aware of this fact and the interest charging rules of the financial organization or the bank. For those who pay off the balance amount within the grace period provided, it would not be a mind-boggling factor, but those who often fail to do so due t their careless attitude and extravagant nature, might be hit real hard by the concerned financial body.

Let us get it bit more unfolded for you. If we consider an example where a borrower has made a transaction of $2000 and repaid the amount within the grace period (normally 55 days or depends on the card company), they would be exempted from any interest charge. On the contrary, even if $1 is unpaid, the interest charged will be on the actual amount that was borrowed ($2000) and the rates will be applicable since the day the individual made the transaction. You can find the exact details of the deductions and the calculations at the back of the monthly financial statement. The general formula that many card issuers follow to calculate the amount of interest charged to a person is -

APR/100 x ADB/365 x number of days revolved.

Here,
APR= annual percentage rate
ADB=average daily balance

The financial institutions charge interest from the original time when the transaction occurred and until the time the customer pays the total balance. If the customer does not make the full payment, RRFC or a residual retail finance charge incurred. This means that you might need to pay interest even with the final payment and that will be for the time between the previous payment and the final payment.

The credit card would just serve as a revolving credit where you make some investments and pay it off within one or more months. If you do not pay back on time, it may incur you interest charges, which may bring complex interest, charge calculations and complicate your balance segment at the end of the month. It may include various balance segments incurring different interest rates either with a single umbrella credit limit or with different amount of credit limits. This compartmentalization is done so, to get easy payments from cards of other users.

In cases where there are many transactions and all of them under different interest rates, the payment allocation of the user is on the discretion of the issuing bank and as the bank will always think of their benefit first, the amount at the lowest rate of interest are paid off first and the payment is considered towards those balances. Once the lower interest payments finishes, the next lowest payment comes into consideration. Rates of interest may vary a lot from one card-company to the other. Moreover, the rate may rise instantly if you are late were late with the payments. The issuing bank also holds the right to increase the rate at its own discretion.

Author Bio: I am William a finance blogger, freelancer and copyright editor from NY. Check out my site at economicrisis.com