This economy has really sent a lot of good people a few rungs down the financial ladder. Even the diversified ones! As the old saying goes, there are three kinds of people in tough times: the haves, the have-nots, and the have-not-paid-for-what-they-haves.
One characteristic that sets the haves apart from the others is their willingness—no, make that their determination—to stay ahead of financial problems.
That can mean a lot of things. Paying your bills on time, living frugally, doing your homework when you invest in stocks (one hour per week, per stock, as I emphasize in my book Real Money, now in paperback). One other underappreciated example of staying ahead of financial woes is to carefully review your bills and statements so you’re not paying for goods and services you didn’t get.
Monday, in part one of "Kill Bill" (hat tip to Quentin Tarentino), I explained how to arm yourself with the knowledge needed to avoid errors and overcharges on your bills. I also explained what to do if you do find an error on a bill or statement. It happened to me in Cabo San Lucas recently—I was seriously overcharged for a bottle of good tequila—and I would have been out a good chunk of money if I hadn’t alerted American Express (Stock Quote: AXP) to the problem. They are great on this stuff, just so you know. So, as the saying goes, don't leave home without it.
Consequently, reviewing your credit card statements is an issue that hits close to home for me. So let’s use part two of "Kill Bill" to take a walk through a typical credit card statement and, in doing so, demystify your bill so you know exactly what you owe your card company, and what your card company owes you.
Credit Card DNA
Let’s take a look at a typical credit card statement, using a generic statement that is consistent with most bank credit cards.
Here is how your statement breaks down:
• New Payment Address: The credit card company’s address (where you send your payments).
• Previous Balance: The amount due on the previous month billing.
• Average Daily Balance: The daily average that many card companies use to calculate finance charges.
• Percentage Rates: The interest on credit card charge amounts unpaid before the due date. The monthly periodic rate is simply the annual rate divided by twelve, for the total months of the year.
• Minimum Payment & Due Date: The minimum balance due to keep your account current and the date your payment is due. Most card companies give you seven to 10 days for mailing prior to the due date.
• Available Credit: The amount of your total credit line available to you for purchases and cash advances as of the statement date. Your available credit changes when payments, credits and new charges post to your account.
• Billing Date: The cycle date of your statement. Your statement includes all activity through this date.
• New Balance: The total amount outstanding on your account, i.e., the total balance due as of the statement date. That’s the amount you must pay your card company to avoid late fees and other finance charges.
• Finance Charge: The charge for using your credit card. Finance charges include interest costs and other fees. Finance charges are calculated by multiplying the monthly rate by your card’s average daily balance.
• Contact Us: The information you need to contact your card lender.
• Transactions: The monthly account activity such as payments, purchases and cash advances, with transaction dates.
• Posting Date: The date your credit card company received your purchase from the retailer or business. Typically, this is several days after the purchase date.
• Reference Number: Your credit card company attaches a specific number to each of your card purchases or payments for reference.
Each item on a credit card statement is there for a reason, but some items, for the card customer, are more important than others when it comes to finding possible errors, overcharges or other mistakes.
Aside from the line-by-line examination of your actual purchases, the two most critical items are the total balance and the minimum amount due to the card company. For the minimum payment, card companies use the following factors:
1. Amount of balance
2. Ratio of balance to available credit
3. Customer’s payment history
4. Interest rates and fees
For decades, many card companies held payment minimums to about 4% of the cardholder’s total balance. But recently, to extract more cash from customers, card companies have been bumping those rates up to get customers to reduce their card balances. To figure out how your minimum payment impacts your total credit card bill (and to ensure its accuracy), use our calculator at BankingMyWay.com.
The importance of your annual percentage rate. Your annual percentage rate, or APR, drives the amount of money you’ll pay on your credit card bill. By and large, the higher the rate, the more you’ll pay to use your credit card. In other words, think of APR as the cost of credit. To calculate your monthly APR, just divide your annual percentage rate by 12. For example, 16% divided by 12 is 1.3%. To calculate your monthly finance charge with a monthly APR, just multiply your average daily balance by your monthly APR. For instance, $200 x 1.3% is $2.60
Figure out your minimum payment. Paying only the minimum payment on your credit card bill, to me, is like throwing money out the window. But in tough economic times, sometimes that’s all a lot of people can do. And don't I know it. When I graduated from law school back in 1984, I got three cards and ran them all up to the maximum limit in no time at all, just to be able to live in New York. By the time I was done, I was paying more interest than principal! Fortunately, I got on commission at Goldman Sachs and was able to pay my bills, so I wasn't doomed to spending the rest of my life paying those cards.
I’ve only covered what’s on the front of your card statement, but know that if you take a cash advance, that charge will also appear on your bill, and usually with a higher interest rate. Also, if you lose your card, or suspect it has been stolen, immediately call the customer service number, usually on the front of your statement (it's also on the back of your actual credit card, although that might not be too helpful if your card's just been snatched). If you let your card issuer know your card is stolen before someone else uses it, you won’t be held responsible for any charges. I hope you never have this problem (unlike me). At least in my case, the situation was about as painless as you're going to get, given the circumstances.
As I’ve said, reviewing your credit card statement is a glamour-free, yet important financial exercise. The more you know about your card statement, and how your card company structures it, the better the chances of catching mistakes and negotiating better terms with your card company. And never forget, if you are in a jam with a credit card company and can't pay, don't be afraid to negotiate. They don't want you to default any more than you do, so do not hesitate to explain your circumstances and get some forbearance! As always, if you don’t want to worry about any of this stuff, just use a debit card! I would be a hypocrite if I didn’t mention debit cards, because that’s what I use now.
—Brian O’Connell contributed to this article.