Your Credit Card & the Interest Charges – Do You Really Understand the Interest Calculations?

Credit Card have become the convenient way of shopping for the products and services in the civilized world. Banks continuously bombard the consumer with the messages of the benefits of using their credit card.

It is true that there are benefits, most obvious is that your credit card company will not charge any interest on your purchase if you make a full payment of the entire outstanding balance every month.. That means that your own money can keep on accumulating interest in your favour in your bank for that duration.

Credit card companies, however, do charge interest if the outstanding balance is not paid in full every month. The interest rate is stated in their card holder’s agreement. The fact is that the card issuers count on those consumers who do not pay their outstanding balances in full for the viability of their credit card operation.

Though interest free period is well known to the consumer, most do not know how the interest is calculated if the balance is not paid in full. To understand let us get familiar with the following terminology:

APR= Annual Percentage Rate

ADB= Average Daily Balance

NDR= Total Number Of Days Revolved Before Payment Is Made

RRFC= Residual Retail Finance Charge… interest charged back to the original time of the transaction and up to the time if a payment is not made in full.

Let us say, if one makes a purchase of 500 dollars and pays $490 dollars when the statement comes. As the payment is not made in full, the credit card company will charge interest on the full amount of $500 dollars from the date of the purchase. Most common method of interest calculation, by the card issuers is as follows:

(APR/100 x ADB/365) x NDR

When the card holder gets a monthly statement, the interest is calculated till the statement date and that is included in the statement.

For example, take the following case of a credit card:

Date of Purchase Made: Feb. 20, 2010

Statement Date: April 2, 2010

Outstanding amount Including Interest accumulated till the statement date: $1,513.00

Payment Due Date: April 22, 2010

If the card holder sends in the payment of $1,513.00 to the credit card company on the due date, he will still see a small portion of the interest that is accumulated from the credit card statement date to the date the all outstanding amount is paid in full,

(Total amount accumulated from Date of Purchase Feb. 20, 2010 to April 22, 2010 Less Total amount accumulated from Date of Purchase Feb. 20, 2010 to April 2, 2010 )

This is because of the RRFC (Residual Retail Finance Charge… interest charged back to the original time of the transaction and up to the time if a payment is not made in full).

Though millions use the credit cards daily, few read the card holder agreements, and fewer are aware how the interest is calculated on their outstanding balances. If the consumer was to become more aware of this, perhaps many will try to pay more than the minimum payment required.

Governments are stepping in now to make the card holder agreements in plain English and more transparent that are easier to understand. Banks are not really worried, at least not as yet, as the consumer’s attitude remains nonchalant.

Author: Nawel K Seth, M.A.Sc; MBA

The author, Nawel K Seth is a veteran in the field of

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100 Financing Investment Property

100 financing of investment properties refers to 100% financing from outside for your investment in real estate. Funds that are brought from one’s own savings, on loan from friends or relatives are in a way not much different from capital whereas real debt or Investment property financing comes from financial institutions. These entities – banks, mortgage firms and lending organizations like credit unions — lend funds to the applicant on the trust of a collateral security or based on the income, credit-worthiness and repayment capacity of the individual. Even if these criteria are satisfactory, an investment property financing institution may ask to be shown the business plan of how the applicant means to generate income using the pieces of property he or she means to buy and consequently pay off the loan or conclude the mortgage. The lender has the right to know how the business is going to be conducted because the revenues of this business determine how fast the loan is going to be repaid. With the turn in the economy, 100% financing investment property has almost been done away with.

100 financing investment property

In the United States, there are three credit bureaus, Equifax, Experian and Transunion, that maintain records of the lines of credit extended to each individual and how they are being handled. The credit reports formulated by these bureaus reflect how many credit card accounts a person has, how many times he or she has defaulted in payment or gone over the credit limit; other forms of financing availed by the individual such as home mortgage, auto finance or student loans, are also listed. Lenders and creditors have access to these credit reports and use them to check if an applicant is worth the risk of being given a loan. The exact features that point to an applicant as being risky can be found out after a professional analysis of one’s credit report. A high Debt to Income ratio and loan to value ratio are some of the red-flags. These areas have to be improved so as not be saddled with an exorbitant rate of interest and terms that are not favorable to the borrower. Some unfavorable terms are floating interest rates that send the finance charges through the roof upon a single defaulted payment. To prevent this eventuality, it is better to choose a deal with a fixed (flat) interest rate or a low ceiling rate on the interest rate slab.

Lending fees, high interest rates, discount points (another form of lending fees paid upfront to prevent the interest from racing up) can actually break the bank. In fact, there are many cases in which discount points have been deceptive and one ends up paying more for them, than the actual interest (finance charges) that would have been paid if the interest rates did go up. To prevent such goof ups, it is a good idea to take estimates from two or three lending organizations, compare their offerings and then choose the one that appeals most to one.

The worst pitfall to guard against is when some lender tells you that you are eligible for 100% financing of investment property. Those idyllic days are over. In fact, they are past their sell by date because there were not so idyllic. There may be such plans available on subsidy from the government for the exclusive use of first time homeowners who belong to the low income group. But this does not include investment property dealers. Traditional methods of 100% financing are now called owner financing and are still available but they are not an attractive option. It is not surprising that requests for owner financing are viewed with suspicion of default by lenders and therefore, that avenue is best avoid

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