How They Quietly Keep You in Credit Card Debt with Their Interest and Fees
The credit card debt industry is very profitable across the globe. However, one must also understand that credit card companies are at risk too. They are at risk of customers defaulting or filing bankruptcy and taking the financial loss that goes with it. And because of the recent real estate crisis in the United States, more consumers are focusing on paying their secured home loans over their unsecured credit card debt just so they can protect years of investment and have a place to live. Once again, the credit card companies are at an even greater risk of loss so they come up with ways they can stay profitable and survive as a business. And these are relatively quiet ways that depend on you not reading their updated credit card agreements they send in the mail. But these methods keep you sunk in credit card debt.
Interest compounds each billing cycle. What makes a credit card debt build up so fast is the fact that there are twelve periods in a year where interest is compounded against the balance. It is not a straight annual percentage rate (APR) calculation. There are different ways that interest is calculated against the credit card debt but the most common way is by applying the monthly rate (APR divided by 12) to the average daily balance. The average daily balance is calculated by taking the beginning credit card debt balance for a customer, subtracting out any payments and adding any purchases and/or cash advances posted that day. The next step in average daily balance calculation is to add up the balances for each day in the billing cycle and dividing it by the number of days in the same billing cycle. The number of days in a billing cycle is typically 30 (one month). With average daily balance calculations, you can actually save a little on interest if you pay your bill as early as possible following the billing cycle closing date.
What kind of billing cycle is your credit card company using? Read your credit card agreement closely to determine what it uses for a billing cycle. Some credit card companies use what is known as double-cycle billing. When your credit card company uses double-cycle billing, the average daily balance on the previous cycle is included too—even if your balance this month is lower most of the month. If you are carrying a lot of credit card debt, double-cycle billing probably has little effect but if you are able to pay down your balance significantly in one month, you still get penalized for the balance in the previous month. Double-cycle billing is under a lot of scrutiny right now and some companies have even abandoned it because of the bad publicity.
Universal default will make your credit card debt climb rapidly. Another practice credit card companies have been using that is also getting its share of bad publicity is the practice of universal default. In other words, you could be a perfect customer with one credit card company yet miss a payment with another company where you have credit card debt and it could affect your interest rate with both. The one you have a perfect reputation with can raise the interest rate it has with you just because of the missed payment with a totally separate company. If you have a lot of credit cards, you credit card debt goes through the roof because of raised interest. Some companies are also abandoning universal default because of the bad publicity.