When applying for a credit card, it’s important to consider how you will make your monthly payments. This determines your credit score and can affect how much your card purchases cost you in the long term. Here’s how you can set up a payment plan that fits your needs.
Your payment profile
Are you more likely to pay your balance in full every month, or do you prefer to make minimum payments over time? Your method is your own payment profile. Knowing your payment profile can help you establish a payment plan that works best.
Paying over time
If you make the minimum card payments every month, you most likely prefer to pay over time. While this method may save you money in the short term, it will cost more in the long term due to interest.
Understanding your balance
Credit card companies apply interest to any unpaid balance on your account. It’s important to know your card’s current interest rate, when it’s applied and how much it will increase your bill. You can start by understanding how your balance is calculated.
A balance can be calculated in the following ways:
Average daily balance:
Calculated by taking the amount of debt you had in your account each day during the billing statement period and averaging it. (most common method)
Calculated by subtracting the payments you’ve made from the previous balance.
Calculated by taking the outstanding balance at the end of the previous billing statement period.
Figuring your interest rate
The interest rate your credit card issuer uses is determined by a variety of factors. The prime rate, the Treasury Bill rate and the federal funds or Federal Reserve discount rate are each taken into consideration. This information will determine your “base” or “index” rate, which will vary depending on the aforementioned factors. Cards with a variable rate will change their rate the fastest.
Once you know how your rate is determined, make sure you also know your grace period. This is the amount of time you have to pay before interest will be applied. An easy way to calculate your grace period is to subtract the due date on your current statement from the date the statement was issued.
Setting a strategy
Using what you know about your balance and your interest rate, estimate how much you will owe for your next billing cycle. Decide how much you want to pay, keeping in mind the interest that the new balance will accrue. If you usually pay your bill through a monthly check, try setting up autopay instead. Autopay will allow you to schedule your payments and ensure timeliness.
Be honest with yourself about why you are choosing to carry a balance. If you are in a situation where you are overloaded by your credit card, it may be time to look at options to pay it off. Many people do this through transferring the debt to a card with an introductory interest rate of zero percent.
Paying in full
While it’s not common for most to pay off credit card balances in full every month, it is good practice. Doing so, however, doesn’t mean you won’t have to think about other fees. Your balance and interest rate are determined the same way as someone who pays the minimum rate. There are also annual fees and finance charges to consider. If you know you will be paying in full every month, consider applying for a card with no annual fee and a decent grace period before finance charges are applied.
Making payments is part of having a credit card. In order to make the process go as smooth as possible, it’s important to have a plan in place. Know your payment profile, and take some time to understand your monthly credit card statement. This will allow you to develop the most cost-efficient payment plan and keep your credit in good standing.
Original source: Bankrate