Record Keeping

In addition to understanding the importance of paying as much as you can toward your credit card bill each month, it is also critical that you keep good records to ensure that your bills and payments are accurate.

If you have a credit card, you will receive a monthly statement listing the account activity during the most recent billing cycle. The reverse side of the bill usually describes some of the basic terms of your credit agreement, including how the interest is calculated and where to call with billing questions.

Following are some of the items that are likely to appear on your monthly statement

New Balance Your previous balance, plus any purchases, cash advances, and late fees, minus any payments and credits. If you pay your credit card bill in full each month, the new balance will be the sum of your new purchases and cash advances.

Credit Line The maximum dollar amount you can borrow on the card at one time.

Minimum Payment Due The minimum dollar amount that must be paid each month. This is usually 2 to 3% of the amount owed and is often based on the balance at the billing date.

Credit Available This is the amount of credit remaining on your card after your balance and your current charges are subtracted from your total credit line.

Payment Due Date The date your payment must be received by the credit card issuer--not the date it is postmarked.

Previous Balance This is the amount you owed at the end of the previous billing period. Any payments, credits to your account, or new purchases are not included.

You should always keep the receipts from the purchases you make with your credit card so that you can compare them to your statement at the end of the month and ensure that your bill is accurate. If you find a discrepancy, take steps to resolve it immediately by reporting the problem to the credit card company in writing within 60 days of date the bill was sent to you.

Understanding finance charges
Assume your billing cycle is the same as the calendar month and on April 1 you get a cash advance of $180 and are charged a $20 fee. Interest begins accruing immediately. When you receive your April billing statement at the beginning of May, your average daily balance for the month of May is $200 since you made no additional charges or payments after your cash advance.

The finance charge is calculated using a periodic rate, which is the interest rate, or cost of credit, in relation to a specific period of time.

Let's assume the annual percentage rate or APR for this credit card is 18%. This means your daily periodic rate is 0.0493% or 18% divided by 365 days. To calculate your monthly finance charge, multiply the average daily balance ($200) by the daily periodic rate (0.0493%).

$200 (average daily balance)
x 0.0493% (daily periodic rate)
$0.10 per day (for each day you have the $200 balance)

Then multiply the charge per day ($0.10) by the number of days in the month (30).

$0.10 x 30 days = $3 (finance charge)