Credit Card Debt

When you have credit card debt, you have made charges, but have not paid them in full when the bills came. When you carry a balance, the credit card company makes money.

The amount you are charged for borrowing money and carrying a balance is called the finance charge. You will also be charged a finance charge if the transaction doesn’t receive a grace period. This usually applies to cash advances.

The rate of interest you will be charged on money you borrow through a credit card is called the annual percentage rate (APR). The APR does not include late, over-the-limit, balance transfer, or other penalty fees. Many cards have several APRs. They may have a low, introductory or promotional APR that increases after a specified period of time. Usually, it’s 3, 6, or 12 months. Interest rates can also go up if you miss a payment by more than 60 days or market conditions change that justify a rate increase. Most rate increases require a 45-day notice. They may also have different APRs for different transactions. For example, cash advances typically have higher APRs.

You will generally have a lower APR and therefore, lower finance charges if you have high credit scores. The opposite is true, too. If you have low credit scores, your APR will be higher and you will pay more in finance charges.

The finance charge is calculated each billing cycle based on your balance, the type of transactions you make, and your APR. Credit card companies can use any of the following methods to calculate your finance charge:

Your daily balance
An average of your daily balances
The balance at the beginning
The balance end of the month
Your balance after payments have been made and applied.

Your bill will require you to make a minimum payment. This is typically four to six percent of your balance and the finance charge. If you pay only the minimum balance, it will take you a long time to pay off your credit card bill because most of your payment is going to pay the finance charge. Very little of your payment is actually applied to the balance. So, it takes a long time to pay off the debt and you end up paying a lot of interest.

If you have a high balance and high APR, your minimum balance may not pay the entire finance charge for the billing cycle. When this happens, you may not ever pay off your balance. In this situation, the credit card company is required to put a warning on your credit card bill. This is called a negative amortization warning.

If you want to get rid of your credit card debt:

Pay more than the minimum required. Pick a fixed amount that is 1.5 or 2 times greater than the minimum payment for the next month you have to pay your bill. For example, if your minimum payment if $50 this month, pay $75 or $100. Do not add to your balance. Pay this amount each month even though the minimum balance changes. This is often the fastest, most affordable, and easiest way to eliminate credit card debt.
Make an extra payment during the month. Be sure write a letter to accompany the payment that states the payment is for principal only. It will be applied to the principal with direction as long as your monthly payment covered the entire portion of the finance charge.
Ask for a lower APR. This will bring your monthly finance charge down. This is only feasible if you have been on time with your payments and/or have had other, better credit card offers. Cite these offers when you call your credit card company to ask for a lower rate.
If you are having a hard time making your credit card payments, explore a payment or hardship plan option. Many credit card issuers are willing to work with you. They may refer you to a nonprofit consumer credit counseling service to set up a Debt Management Plan.