Important Financial Terms

: Chris Lee Law Firm

  Filed under: Money Management

financial termsWe could all use a little help with managing our money better. The personal debt crisis has taken a trip away from our control and too many of us are facing tough decisions, such as foreclosure or bankruptcy. The good thing is that it is never too late to make a change, but getting out of debt takes time and effort.  The best place to start is by learning about your current debt accounts and the details associated with them.

Annual Percentage Rate (APR) – is the amount of yearly interest on a credit card. This amount is not the same as your interest rate, because it is calculated from the fees and costs that were accumulated in order to secure the loan on the account. In other words, it reflects the annual cost to you for borrowing the money. The APR can affect how much you pay in fees and finance charges on your loan balance and sometimes these fees can change without warning, as in the case of a variable APR.

Credit Limit – is the maximum amount of debt you can accumulate on your account. However, it is important to note that while you may be able to charge more than this amount, you will be charged over-limit fees for doing so. Your credit limit may also change from time to time depending on your payment history, sometimes without advance notice. It is important to watch your credit limit and keep your overall debt balance to less than 40 percent of your total credit limit.

Finance Charge—is the cost of borrowing using a credit account. It can be calculated by several methods, each affecting your monthly payment differently.  It is important to know how your finance charges are being calculated to prevent yourself from becoming overextended on your line of credit. The average daily balance method is the most common and uses the average of your balance for each day of your billing cycle to calculate the percentage of interest applied to that month’s statement. The previous balance method calculates your charges by using only the balance at the end of the billing cycle. The double billing cycle method is the most expensive and uses the average daily balance from the last two billing cycles, forcing you to pay interest on balances that have already been paid.

Minimum Payment—is the lowest amount required for payment on a credit card balance per billing cycle. The minimum payment is influenced by your purchases, credits, interest rate and APR.   Failure to pay the minimum payment can result in late fees and delinquency charges. Paying more than the minimum payment on accounts can help pay off debt in a shorter amount of time.






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