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Understanding how credit card interest is calculated

Using credit cards can create financial challenges especially if consumers do not watch their spending and do not understand how interest is calculated. Credit card users with consumer debt who experience unemployment, reduced income and increased expenses may face creditor harassment because of delinquent payments. Consumers in Pennsylvania and across the country who are making only minimum payments on a credit card to their credit card company could benefit from understanding how credit card interest is calculated.

In a recent article, one credit expert explained how math mistakes cost cardholders extra money. She advises people not to wait until their payment is due to pay on cards that charge interest on the average daily balance. Paying minimum monthly payments as soon as possible reduces the average daily balance on which interest is calculated. Furthermore, instead of trying to pay extra on all debt all the time, consumers might focus on paying extra on highest interest debt first to get out of debt as fast as possible.

People believe that constantly paying the balance on their credit card debt each month reduces their statement balance for a fixed end, and the Credit CARD Act requires creditors to list the payment needed to pay off the current balance at the current interest rate in three years. However, each new monthly statement actually lists that repayment period with a new balance from payments and purchases. Constant payments only pay down the debt consistently if they are made for at least the same amount each month without using the card for new purchases.

If a consumer is dealing with debts that are unmanageable, it may be possible to seek relief by filing for bankruptcy. Federal bankruptcy protections may be able to provide a debtor with a stay of collection action or a discharge of obligation to pay certain outstanding balances.

Source: Fox Business, "3 Credit Card Math Mistakes That Are Costing You Money," Gerri Detweiler, March 2, 2015

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