For many people, the terms used by credit card companies can be bewildering.
What’s the difference between your annual percentage rate and your daily periodic rate? Or your monthly finance charges, or your average daily balance? Well, take heart and be of good cheer, for here is a handy glossary of terms for your reference. The next time you view your credit card statement, you’ll know what all of these things are:
The Annual Percentage Rate (APR)
This is the interest rate you are paying on your credit card, as expressed in an amount you will pay annually. In reality, of course, your interest is compounded more often than once a year.
Monthly and Daily Periodic Rate
Usually your annual percentage rate is calculated as either a monthly periodic rate or a daily periodic rate. It’s an important component of your monthly finance charge calculation, since the higher the percentage of your interest rate is, the more your credit is costing you.
Average Daily Balance
This figure represents the average of your balance over the course of the month, and is the other major factor that comes into play when calculating your monthly finance charges. To calculate the amount of interest you are paying every month, the credit card company typically multiplies this figure by your periodic rate to come up with your finance charge.
For example, let’s say that in the month of January, your average daily balance on your credit card is $1000. Your APR is 12%, which is calculated at a daily periodic rate of .03288%. There are 31 days in the month, so your finance charges for the month of January would be:
$1000 (ADB) x 12% (APR) x 31 days = $11.02.
You credit card may also charge you an annual fee. Annual Fees are a membership fee, separate from your annual percentage rate, which may be charged in addition to your other finance charges, late fees or overlimit fees. Check with your credit card company to see what type of annual fees your card may have.