Lenders use a bafflingly complex system of pulleys, ball bearings, mirrors and Boolean algebra to calculate your finance charge. In the end, most come up with a figure somewhere between 0% to 32%.

Some banks charge a fixed APR (annual percentage rate) that doesn't change, while others charge a variable APR which is tied to an index, such as the prime rate. The Schumer Box -- which must legally be included on every credit card solicitation -- contains all a card's vitals. If you can't figure out your card's APR by looking at your monthly statement, simply call the customer service number for a translation.

Chances are that you carry a card that charges interest on the average daily balance, which is calculated by adding each month's daily balance and dividing that number by the number of days in the month. Many have a grace period during which you do not accrue finance charges. If you do not pay off your balance in its entirety for each billing period, however, you will accrue interest on new purchases from the day they are posted.

The interest equation takes on labyrinthine proportions when you try to figure out whether or not it is based on two months of billing cycles -- the current and the previous -- and the exact length of your grace period. Some lenders use an "adjusted balance" method where the previous month's payment is subtracted and the finance charge is based on the remaining balance.

None of this matters if you pay your balance in full each month. If you can't pay it off, find a card that excludes new purchases from the interest calculation period.

Penalty Rates
Once you have figured out your APR, your lender will probably change it. In fact, credit card companies are not required to notify you in advance before they move the decimals and change the digits. You agreed to let them do so at any time when you signed up for their card.

What raises their ire? Your spending habits, for one. Even if you pay all your bills on time, you may get flagged. Your creditor may look at your credit records every quarter to evaluate the amount of debt relative to the amount of your current income. One recent notice received by a Fool staffer stated that customers could not increase "significantly" the amount they spent on another unsecured card. It defined "significant" as $2,000 or more. Keep your eye on your rates if you plan to make any big purchases.

Your bill-paying habits can also affect your interest rate. If you miss a few payments you could be subject to a penalty rate of up to 32 percent. So keep close tabs on when your payment is due.

Teaser Rates
Like a cotton candy buzz, teaser rates don't last. But they are darn tempting. Creditors are now making it more difficult to continuously transfer balances from one low-interest-rate card to another. If you toss cards aside like wet-naps after a rack of barbecued ribs, be prepared to pay a penalty.

Here's a typical scenario: An offer for an eye-poppingly low rate card arrives in your mailbox. You jump at the chance to transfer a heap of money you owe to a high interest card to the new card. After six months, the interest rate on your new card jumps to post-promotional levels -- usually in the high teens or low twenties. But you've already got another low-interest lender lined up. You transfer your balance, and, boom, the dumped card charges you retroactively the higher rate because you didn't read the microscopic print which points out that you cannot transfer a balance for an entire year.

Before you sign up for a card with a low, low interest rate, find out what that rate applies to -- New purchases? Cash advances? Balance transfers? Watch out for cards that force you to pay a retroactively higher rate or charge you a penalty fee if you cancel the card. And don't fall for one that expires sooner than 6 months.

Lowering Your Rate
If your current lender is charging you more than 12% interest, it's time to re-neg-oti-ate, Fool. Use our Foolish Rate Negotiation Dialogue (tm) below to bully your lender into lowering your interest rate.

You: "I just got this incredibly great offer from First Union Banc USA Nation's Edge Choice card for a Titanium card with a fixed APR of just 5.9% for the rest of my living days! I don't really want to switch cards, your service has been great. But I've noticed that the interest rate you're offering me has crept up to 43.9% in the past year. I'm going to have to transfer my balance unless you can lower the interest rate."

Them: (The sound of typewriter keys tapping and your credit and payment history being scrutinized.)

You: "Did I mention the free toaster?"

Them: (The sound of fake typing as the operator tries to psych you out with silence.)

You: (The sound of you filling out the First Union Banc USA Nation's Edge Choice card application.)

Them: "Uncle! We'd like to keep you as a customer, so I am prepared to lower your interest rate, and waive your annual fee if you choose to stay with us."

Another tactic is to remind your lender that he is making money off of you, even if you pay off your balance each month. Credit card companies make 1.3% to 2.5% from the merchants on every dollar charged. You can use this as leverage to get fees removed and reverse grace period adjustments. Simply keep track of how much you charge each year. When your lender tries to hit you with a $45 annual fee, call and remind them that they got $1250 per year (or whatever the amount was) in merchant fees, which they won't get next year if you cancel your card. Sit back while the customer service rep grovels.

Next up, the most important part of a debt-free Fool's lending agreement -- the grace period.

-- Dayana Yochim (TMF School)

Next: The Grace Period »

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