Understanding Your Credit Card Statement

Ready to demystify your credit card statement? You may cringe at the thought of opening it each month, but understanding all the numbers and the fine print is important — on both the front and the back.

Take a look at your monthly credit card statement, and you'll see that it contains a great deal of important information. If you compare statements from several different companies, you'll notice that although they may look different, there are many common elements. So what is really important to look at when you get your statement each month? There are several key pieces of information both on the front and the back of the statement that will help you better understand your credit card account.

The Front of Your Statement

Annual Percentage Rate

The Annual Percentage Rate (APR) is the amount of interest you will pay on an annual basis. The APR is an important factor in calculating your monthly finance charges. The higher this rate, the more money it will cost you to use this credit. On most credit card statements, the APR is presented as both the APR and either a Daily Periodic Rate or a Monthly Periodic Rate. To compare the interest rates of credit cards, visit IndexCreditCards.com or Bankrate.com.

Minimum Payment Due

The minimum payment is the amount you must pay on credit card accounts each billing cycle to remain in good standing with your creditor. The minimum payment is usually determined by taking a percentage of your new balance.

Each bank or credit card issuer determines your monthly payment by using a formula that is specific to their company. One bank may determine your monthly payment amount by using a formula of 2% of the outstanding balance, while another bank's formula may be 2.5% of the outstanding balance. You must make at least the minimum payment by the due date to protect your credit reputation. Late payments are recorded on your credit report.

Here is an example:

You can determine your lender's percentage for minimum payment formula by dividing the minimum payment due by the new balance. For example, if the credit card statement lists a minimum payment of $22.85 and the new balance is $1,039.04, then

$22.85 / $1,039.04 = .0219915 or 2.2%

Or, you can estimate your monthly payment by multiplying your new monthly balance by the monthly percentage rate of interest charged, if you know it:

1,039.04 x 2.2% = $22.85

As a rule, you should try to pay as much as you can to avoid increased finance charges. At the very least, you should pay the minimum payment on your credit accounts before the due date. If your goal is to pay off the bill and reduce unnecessary fees, pay more than the minimum amount each month.

New Balance

The new balance on a credit card account is the unpaid amount or what you still owe. It is usually determined by:

• Starting with the previous month's balance

• Subtracting any payments or credits

• Adding new charges, miscellaneous fees and finance charges for the current billing cycle

Here is an example of how this may look on your credit card statement.

Finance Charge (Interest)

In general terms, a finance charge is the cost of credit. It is what you pay a lender for using credit. The finance charge on your monthly credit card statement is the interest you pay on the unpaid balance of your account. The calculation method used to determine the finance charge has an effect on the amount you pay in finance charges. The most commonly used calculation method is the average daily balance. When this method is used, the average amount of debt you have in your account each day is used to determine the monthly finance charge.

To calculate the Monthly Finance Charge using the Average Daily Balance:

Average Daily Balance x Daily Periodic Rate** x Days in Cycle = Monthly Finance Charge

For example, on your August statement you owe an average daily balance of $100. Your annual percentage rate is 12%, which is a 0.03288% daily periodic rate:

$100 x 0.03288% x 31 Days = $1.02 Monthly Finance Charge

** Your Daily Periodic Rate is typically found near the bottom of your statement where the Finance Charges are explained.

Grace Period

A grace period is the number of days you have before a credit card issuer starts charging you interest on your new purchase. This is usually 20 to 25 days. Read the fine print on your monthly statement to determine the grace period offered by your credit card company. This calendar shows you an example of what a typical grace period might be:

On most credit cards, the grace period only exists when the previous month's balance has been paid in full. So unless you have paid your credit card in full the previous month, you do not have a grace period. When you pay monthly bills in full, there are no interest charges on new purchases you make during the billing cycle. But if the previous month's balance was not paid in full, interest charges are assessed on the previous balance and on any new charges you make before the next bill is due. As soon as you make a new charge, interest begins to accrue on that purchase. When you get a cash advance using a credit card, there is NO grace period, even when the previous balance was paid in full.

Pay your bill in full each month to take advantage of the grace period. If you can't pay your bill in full each month, pay early in the billing cycle to reduce the average daily balance used to calculate your interest charge.

Credit Card Limits (Credit Line)

This is the maximum amount that you can borrow on a credit account. Your maximum credit limit and your available credit limit (the maximum credit limit minus current charges) are stated on each credit card billing statement. A revolving credit account is one in which you have the choice of paying the entire amount due during a monthly billing cycle or spreading repayment over several months by making at least the required minimum payment. You can continue to make charges on the account as long as you pay at least the minimum amount due each month and do not exceed your credit limit. Think of a revolving credit account as a continuous debt treadmill. If you never pay the bill in full you can never stop to rest; you have to keep running.

If your maximum credit limit is too high, ask the card issuer to lower it to a level that makes you more comfortable. If the issuer increases the limit without asking you, tell them to lower it. High credit lines could keep you from getting a loan. Although you may have no intention of charging up to the maximum credit limit, potential lenders might see that as a negative when evaluating loan applications. The lenders may view the credit as available and determine that you might resort to using the credit.

Credit Card Fees

Credit card fees vary with the type of card that you have. Also, the type of fees that banks or credit card issuers attach to their cards can change. Read the fine print on your monthly statement, the annual disclosure statement, or call your credit cardholder's toll-free consumer assistance line to learn more about fees that might be unique to your card. Fees common to many credit cards include:

• Annual Fee – An annual fee (or yearly membership) is the fee you pay to have a credit card. The amount of the annual fee varies with the type of card you have. Cards with extra features or rewards such as frequent flyer miles may have a higher annual fee.

Tip: There are credit cards with no annual fee. Try to find a card with no annual fee that meets your needs.

• Late Fee – This is a fee you pay the bank or credit card issuer when your monthly payment does not reach them in time to be processed by the due date. The amount of the fee varies among banks. Late payments are recorded on your credit report.

Tip: Mail your monthly payment in the return envelope included with your bill to ensure that the payment goes to the correct address. Also, mail the payment as soon as you can or at least so it arrives 2-3 business days before the due date. Remember to keep holidays in mind when mailing your payments and the earlier you make your payment, the better.

• Over Limit / Over Line Fee – Each credit card has a credit line that was probably based on your lender's review of your credit report. A fee or penalty may be charged each time you exceed or go over that limit. For example, if your credit line is $5,000.00 and your monthly unpaid balance plus new charges for the month are $5,050.00, you could be assessed an over-the-limit fee by your card issuer. Some lenders may send you a notice asking you to pay the amount over your credit limit immediately.

• Returned Check Fee – If your check to pay the monthly bill bounces because you don't have enough money in your checking account, the creditor will tack on an additional fee for the returned check. Your bank won't hesitate to charge your checking account also for the overdraft.

Tip: Balance your checking account monthly so you don't write checks that exceed the balance in your account.

The Back of Your Statement

If you dare to turn the statement over, you'll see a sheet full of fine print. These paragraphs may not be the most fascinating text you have ever read, but you will find many details that are important to your success as a credit card holder. For example:

Cash Advance Fee

This is a fee the card issuer charges you for taking a cash loan from a bank using your credit card. The maximum amount allowed for a cash advance is printed on the back of your monthly statement. Card issuers usually charge a percentage of the loan amount.

Let's say you get a $500 cash advance and your card issuer charges an advance fee of 3% of the loan amount. Your cash advance fee for this transaction would be $15. Additionally, most card issuers state a minimum fee that each cash advance will be assessed. For example, your card issuer's cash advance rules may be 3% of the loan amount or a minimum fee of $5. If you get a cash advance of $100 your fee will be $5 since 3% of $100 is only $3 and is less than the $5 minimum. Check the back of your monthly statement to find out what fees are charged by your bank or card issuer.

Tip: Plan your spending to avoid or limit the number of cash advances you get. The interest rate you pay on cash advances can be higher than the interest rate you pay on purchases using your card. In addition, until you pay your bill in full, you will most likely continue to pay interest on the cash advance.

Lost or Stolen Cards

If a thief uses your lost or stolen credit card, you are responsible for a maximum amount of $50 of unauthorized charges. If you contact the card issuer about the lost or stolen card before it is used by a thief, you do not have to pay any of the unauthorized charges. Look on the back of your statement for a telephone number to report your lost or stolen card.

If a family member or someone you know uses your card without your permission, you have to take legal action against them to have the unauthorized charges removed from your account.

Read the card holder agreement or yearly disclosure statement that comes with your card to learn more about lost or stolen cards. When you telephone creditors about lost or stolen cards, write down key information about reporting the card and file it so it can be retrieved later if needed. For instance, record the name of the employee taking your report; the date, time, and notes about your conversation. Be sure to reference the information about the telephone conversation in your follow-up letter to the issuer about the lost or stolen card. If you feel the need for additional proof that you reported the lost or stolen card, send your letter about the stolen card by certified mail with return receipt so you have documentation that you reported it. Also, keep a copy of the letter for your files. For more information about identity theft, see our related articles in the CareOne Knowledge Center.

Disputing Unauthorized Charges or Billing Errors

The number one rule when disputing unauthorized or inaccurate charges is to do it in writing and do it within 60 days of when you received the statement with the questionable charge. An unauthorized charge is one that is made on your credit account without your consent, actual or implied. When writing your creditor to dispute unauthorized charges or billing errors, be sure to include the following items in your letter:

• Your name, address, and account number

• A description of the problem

• The date and amount of the charge

• The reason you think the charge is incorrect

Make certain that you send the dispute letter to the special address on your monthly statement for billing errors or questions. That address is usually on the back of your statement in fine print. It is often a different address than the one where monthly payments are mailed.

Some issuers may have a short dispute form that you can use to start the process for disputing a charge. Read the fine print on your card holder agreement statement and the back of your monthly credit card statement for details on how to dispute a charge on your credit card statement. For more information, see the CareOnearticle about disputing credit card statements.

Owning a credit card includes the responsibility of learning how to use the credit card. Understanding the monthly credit card statement is essential to your success as a consumer of credit. Take the time to review the information on your credit card statement. Verify changes posted to your account every month to make sure that they are correct. If you neglect your credit card statement, there is always a possibility that an error could occur and you could end up paying for someone else's fancy dinner or new lawnmower.

This article is part of a series on Credit Cards. For more information, read the related articles in our Knowledge Center Library.

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