Monday, April 21, 2008

Finance charges

I normally pay off my credit card in full, so I normally don’t pay any finance charges. But due to some distractions, I ended up with $450 carried over for four days last month. For which I paid $22.95 as a finance charge (no late fees). Citibank claims this is based on an annual interest rate of 7.99%.

There are lots of games that banks play to make sure the finance charges are as high as possible. Averaging daily balances, two-month averaging, posting payments late, applying all payments to the balance with the lowest interest rate, and raising interest rates at the drop of someone else’s hat. Most of this is less than transparent. But $22.95 is 5.1% of $450. If that $450 balance was around for a full month, then that would be an annual interest rate of 61.2%. Since that balance was only around for four days, it was actually an interest rate of over 465%. That seems high. And that’s why they call it a finance charge rather than calling it interest.

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