One of the hidden costs of a credit card may be the way iii which it computes interest.
The first—and the better way by far for you—is to charge interest on the average daily balance, including new purchases. The second method, which is much less favorable, is the two- cycle average daily balance, including new purchases. Even if you never carry a balance from month to month, keep away from a company that calculates interest this way. You never know when even you might need some emergency money for a few months, and this is an expensive way to get it. Always leave yourself the best option just in case.
Let’s say you charge $1,000 on your credit card for that Cl) player you always wanted. Even though you have the money in your savings account, you think, Well, I might as well get those airline miles, or I might as well just use my credit card and pay it off when the bill comes in. When the bill arrives you’re a little short, but you send in $980 against the $1,000 bill, thinking that a $20 balance is no big deal. Next month when your statement arrives, even though you haven’t charged anything cisc, you see that you now owe $47.60, $20 from the previous balance and interest of $27.60. How can that be? It’s because your credit card uses the two-month average daily balance method. Not so good, if you ask me.
If, on the other hand, your credit card charged interest on the average daily balance, you would have seen a bill for only $32.60—not chopped liver, but certainly better than $47.60. This represents a $20 carryover from the previous balance and $12.60 in interest: about 54 percent in interest savings. This can really add up if you charge and pay off more than $1,000 at a time. Of course, the numbers will vary depending on the interest rate you’re paying and other factors, but no matter what, you must avoid the two-cycle method, especially if you tend to charge and just pay off your balance two months later.