Understanding Credit Cards: How To Read a Credit Card Statement

by Amy Lillard

Credit and credit cards are an integral part of our economic system today. But there is a lot of misinformation and misunderstandings about credit. In this continuing series, we examine key concepts, tips and best practices when it comes to credit cards.

(11/15/2012) Bills are no fun to receive or to read. But understanding and internalizing your credit card statement can go a long way to developing smarter spending and debt management behaviors.

Statements will vary by company, but each will contain a few key elements that you should understand:

• Annual Percentage Rate (APR): Your statement will pinpoint the exact amount of interest you pay on an annual basis, which goes into the calculation of your monthly finance charges. You can use this information to understand how much you're really paying in debt, and to negotiate lower rates to reduce your debt.

• Minimum Payment: Each cycle, your credit card company will determine a minimum payment that must be met in order to stay in good standing. This is typically determined as a percentage of your balance and finance charges. Borrowers must pay their minimum payment each month to avoid fees and increased interest, but paying more than the minimum is recommended to reduce debt and fees.

• Due Date: Submit your payment by this date in order to avoid late and other fees.

• New Balance: This reflects what you currently owe, including the money you've borrowed for purchases (principal) minus previous payments, accrued interest, and any fees.

• Payments: The last month's payment will be noted.

• Finance Charge: The amount you're paying in interest will be specified, which is determined by your credit card company's particular method of calculation.

• Grace Period: This is the amount of time you have (typically 20-25 days) before a credit card company charges interest on new purchases. Knowing this helps you avoid unnecessary finance charges if you choose.

• Limits: Your credit card limit or credit line is the maximum amount you can borrow. Spending beyond this limit will incur fees and potentially a hit to your credit report.

• Fees: Specific fees charged by your credit card, including annual, late, and cash advance fees, will be noted.

• Transactions: Pay close attention to this list of purchases, transfers, cash advances and other transactions to ensure there are no errors. Report any mistakes or unauthorized transactions immediately to the contact information noted on the statement.

• Rewards Points: If you have a card that accrues airline miles or other rewards , this will be a tally of points earned and available for redemption.

For Additional Reading:
Reading Your Bill: http://www.federalreserve.gov/creditcard/flash/readingyourbill.pdf

Deciphering Your Monthly Statement: http://www.bbb.org/credit-management/new-to-credit/credit-101/deciphering-monthly-statement/index.html

How to Read a Credit Card Statement: http://www.aie.org/managing-your-money/credit-cards/How-to-Read-a-Credit-Card-Statement.cfm