Managing or Avoiding Credit Card Interest

Credit card accounts are loans

A credit card account is a loan account. Every time you use the account for a purchase, to get cash from an ATM, for an overdraft advance on your checking, or a transfer in PC Branch, you are borrowing money. No problem. That's why we're here. And, as with other loans, you'll pay interest (rent, really) for money you use for as long as you use it. Interest is also called the Finance Charge.

Here is some information about how interest works and how you can reduce it or avoid it altogether.

Types of credit card transactions

Transactions on a credit card fall into four main categories:

Purchases – This is where you use the card or card number to buy merchandise or services from a merchant. This could be in a store or restaurant, over the internet, or through the mail. Purchases get special treatment for interest (plus ScoreCard Points) because of the modest fees merchants pay their financial institution, Visa^®, and us for processing these transactions and taking on the risk of offering credit.
Advances – This is where you use the account to get money directly from your credit card account. This can be a cash advance from a teller or ATM; a transfer out of your account by phone, PC Branch, or Easy Touch Telephone Teller; or an automatic overdraft advance into your checking account.
Finance Charges – This is the rent you pay each month for the amount of money you've used each day.
Fees – At DCU, these are charges you would incur for paying your bill late or for charging more than your credit limit allows. There are also fees for conversion of foreign currency or rush replacement of a lost card. Other card companies and financial institutions don't stop there. They may also charge you an annual fee, a fee for every cash advance, an ATM free, and other fees we would not think of charging.

Important – make sure payments arrive on or ahead of the due date

DCU credit card interest rates and those of most card issuers are based on your credit history. If you pay your bills on or ahead of time all the time, you will be rewarded with a great credit rating. A great credit rating will qualify you for lower interest rates almost everywhere.

But paying late or less than the minimum payment due will cost you in fees and can result in an increase in your interest rate. At DCU, if your Visa payment is at least 30 days past due twice in any six-month period, your interest rate will jump to 17.5% Annual Percentage Rate. And that is a bargain compared to other credit card issuers. An October 2007 Capital One mail offer had a penalty rate of 28.15% APR.

Using money free – the grace period on purchases

A credit card is a very convenient way to buy things and it is safer than carrying cash. If you can afford to pay cash for your purchases and don't take cash advances, you can have the convenience without paying interest. Just pay off your statement balance in full (all new purchases) by the due date each month. The 25-day interest-free grace period on purchases makes this possible.

In essence, when you make purchases during the billing cycle, we give you until the payment due date to pay them off before we begin charging interest on the money you've used. If you do that every month, you're getting at least 25-days' use of that money free. Plus, you're collecting ScoreCard points on those purchases.

As some consumer publications recommend, many members have two DCU credit card accounts. They use one for smaller purchases they pay off each month interest-free. They use the other for bigger purchases they want to spread over two or more months.

Reducing interest on purchases

If you don't pay off your balance in full each month, you will start paying interest. The only way to reduce the amount of interest is to reduce the balance (or principal) on which we calculate interest. Here are some tips...

Make more than the minimum payment – Any family may have unexpected high expenses in a given month from time to time. We've made our minimum payments as low as possible so those times can be less of a hardship. However, we do not recommend consistently paying only the minimum. That will maximize the amount of interest you'll pay and increase the true cost of the merchandise you bought.
Budget for a monthly payment and stick to it – The more you can afford to pay each month, the faster you'll reduce the principal and thereby the amount of interest each month.
Consider paying off old purchases before making new ones – New purchases will grow your balance and increase the interest you pay. If circumstances allow, consider paying off each major purchase you make before you make the next one.

Interest on advances

An advance is a direct personal loan from a line of credit. Same as a home equity line of credit or other line, interest starts being charged as soon at the money leaves the account.

Stopping interest on advances

When you make a Visa payment at DCU, your money pays off what you owe in a specific order. It first pays fees, then interest, then the purchase balances on your last statement, then the cash advance balance on your last statement, then your current purchases, and finally your current cash advances. It pays off each item in full before moving to the next.

Because of this order, the simplest way to stop interest on a cash advance is to pay enough to bring your Visa balance to zero. Simply log into PC Branch, click on your Visa account, note the Loan Payoff Amount, and make a transfer from your checking, savings, or money market account to your Visa account for that amount. Check that the new Visa balance displayed is zero.

The best possible value

At DCU, we try to bring you the most convenient, competitive credit card programs possible. Use them well and they make your financial life easier and contribute to your financial well-being. We hope these tips will help you get all you want and need from the DCU Visa.

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Digital Federal Credit Union
220 Donald Lynch Boulevard
PO Box 9130
Marlborough, MA 01752-9130
508.263.6700 • 800.328.8797