Credit Card Interest and Cash Advances

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How Credit Cards Work: Interest and Cash Advances

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Interest on credit cards can be calculated in many ways. The most usual are from the date of each transaction, from the next due date or from the date of the monthly statement. And you generally only get the benefit of an interest-free period on purchases if you pay the previous statement balance in full before the due date.

Credit card debt is unsecured (meaning the card issuer has no claim over a specific asset if you can¡¯t repay the debt), so the interest rate is often higher than for other forms of finance. The best way to keep the cost of credit cards down is by paying more than the minimum. Better still, take advantage of an ¡®interest free period¡¯ credit card to repay the full amount you owe each month and avoid paying any interest altogether.

Paying only the minimum

The minimum monthly repayment on your credit card is usually set at 1.5% to 2.5% of the outstanding balance or it could be a minimum dollar amount. But sticking to the minimum repayment could see you repaying the debt for some time ¨C with a mounting interest bill.

Consider this: If you make only the minimum payments, a $2,000 balance could take over 15 years to pay off, at a total cost of $2,240. That¡¯s assuming an annual percentage rate of 18%, a minimum repayment of 2.5% with no annual fees charged or additional purchases being made during this time.

Unsolicited offers for more credit

Be wary of unsolicited offers for more credit ¨C they can be a ticket to get deep in debt. If you receive a letter from your card issuer offering an extension of your credit card limit, you need to carefully consider whether you need more credit, and can afford to make the additional repayments.

Cash advances

Getting a cash advance on your credit card can be useful in an emergency. But it can also be expensive. A fee is usually charged either at a flat rate, or as a percentage of the cash advance. Interest starts to accrue immediately once the cash advance is drawn ¨C there is no interest-free period. And your card issuer may regard the cash advance as the last amount you pay off. So even if you repay the amount of the advance the next day, the payment is taken off any pre-existing balance, and interest continues to be charged on the cash advance amounts until the full balance of your card is repaid.

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