Sometimes it’s hard to make that paycheck last and you need just a little bit more to get through until the next one. So what options do you have at your fingertip that you can rely on at the last moment? If you have them, the first thing you’ll naturally think of is your credit card and overdraft. Should you?
Credit card companies do not live off the comparatively small percentage they take in on every transaction or, for those that charge them, annual fees. They make the bulk of their money by charging you interest on delayed payments. That’s why they allow you to pay only a portion of your statement this month and push off the rest to the future. It’s not generosity. It’s business. And it’s also a very profitable one.
Many credit card companies provide a grace period before calculating interest. If your payment arrives one day late but on a holiday, for example, they may ignore the tardiness, since it wasn’t your fault that they were closed and the post office didn’t deliver the mail. Even if their computerized systems aren’t programmed to take the calendar into consideration, you can call their service centers and point out to them that you did your part on time and they might correct your statement as a result.
But if you do delay paying off your statement on time, be prepared to pay the interest, and it can be considerable. The Federal Reserve reported that the average credit card interest rate was 12.77% in May 2017. But that’s not the whole story.
The standard interest charged for delayed credit card payments is known as the Annual Percentage Rate (APR). The APR varies from card to card, plan to plan and person to person. Cards that offer rewards, for example, tend to charge the highest interest rates in order to pay for their discounts and gifts. But your own APR is largely based on your credit score. While the APR is, by definition, a statistic that applies to the entire year, the credit card companies use it to calculate their charges on your monthly statement. So to know how much interest you’re actually paying, you have to convert your APR into a daily percentage rate by dividing it by 365, the number of days in a year. At the end of each day, the card issuer multiplies your current balance by the daily rate and then adds that daily interest to what you owe. This procedure is called compounded interest. What that really means is that the longer you don’t pay off your balance the larger the debt grows because it now includes the back interest you have not been able to pay off.
Debit cards are really a form of overdraft protection, since the entire amount of your monthly statement is subtracted from your bank account balance just as if you were to withdraw cash from an ATM or write someone a check.
While most banks charge similar fees for an overdraft, their rules for how and when they do so may vary. One of the lesser known facts about overdraft is that there are several different overdraft fees. As a package, they can be among of the highest fees that banks charge. Apart from the standard overdraft fee, these include an insufficient funds fee, an overdraft protection fee and an extended overdraft fee. These add up and can quickly surpass the interest consumers are charged on credit card debt.