Understanding credit card terms and conditions

There are so many credit cards to choose from, that it may be difficult to sort through all the information. To start with, there are dozens of credit card issuers; some of them are banks that are known worldwide, others are obscure companies that few have heard of. Even comparing all the different types of cards from one issuer can be mind-boggling; many card issuers offer a variety of cards, to serve people with every type of credit rating, and to offer many types of rewards. Choosing a credit card doesn’t have to be complicated, as long as you understand a credit card’s terms and conditions.

Credit card offers are written just like any advertisement; they yell out the good stuff to get your attention, and then some guy, who talks really fast, reads out the legalities. Most credit cards have something special to offer, and that is what will usually be in the biggest print on the page. While you may certainly become interested in a credit card for its special offer, you need to get the full scoop to make an informed decision about a credit card. Go to the smaller print at the end of the credit offer, and find the Schumer box. The information in this box is required, by law, and will be included with any legitimate credit offer.

Annual Percentage Rate (APR) – This is the yearly interest rate that a credit card issuer charges for the use of credit. The card’s APR may be a fixed-rate, but that doesn’t mean the rate can’t change; the card issuer simply has to notify you fifteen days before a rate change. Variable rate card are more common than fixed-rate cards. A variable rate card’s APR is directly tied to an index, commonly the U.S. Prime Rate, but some card issuers use the London Interbank Offered Rate, or LIBOR. The APR is commonly different for various types of transactions; learn the APR for purchases, cash advances, convenience checks, and balance transfers, and be aware of the default rate. A credit card user who usually carries a balance should strongly consider a card with a very competitive APR. A person who rarely carries a balance may still benefit from a credit card with a fairly high APR, if that card offers other useful perks.

Grace Period – This is the length of time before the card issuer begins to assess interest charges, typically 20-30 days with most card issuers. If you can pay off the entire balance before the end of the grace period, you are essentially getting free use of somebody else’s money every month. The grace period is usually only for new purchases. Most card issuers do not give a grace period for cash advances, convenience checks, or balance transfers, unless it is part of their introductory offer to you. Also, most card issuers do not give a grace period for new purchases if there’s a previous balance. A generous grace period should be an important consideration for someone who pays their entire balance every month.

Annual Fee – This fee, a set dollar amount, will be charged every year that your account is open. Many credit cards have no annual fee, but the ones that do may range from about twenty-nine dollars to over a hundred. Annual fees are commonly charged to those with less than perfect credit, but a card for people with excellent credit may have an annual fee if the card offers generous benefits or rewards, or carries a super-low standard APR. If there is an annual fee, that fee will be assessed every year, whether you use your card or not, and even if there’s no balance. Know when that fee will be charged to your account each year. If your balance is nearly at the credit limit when the fee is due, it could cause you to be penalized for going over the credit limit. Not fair, but it has happened to others.

Minimum Finance Charge – This is the smallest amount you will be charged if any finance charge is due. If you had a really small balance, it would be a waste of time for them to add a twenty-nine cent finance charge to your bill. So they round up, to simplify the process and to cover the maintenance costs of a small account. Many card issuers have a minimum finance charge of one dollar.

Balance Calculation Method – Card issuers have several different ways to compute the balance that they will charge you interest on each month.

  • Average Daily Balance is the most commonly used method. The card issuer adds up the balances of every day in the billing cycle and subtracts any credits or payments. Cash advances are usually added to the balance, but some card issuers may not include new purchases. Then they divide the total by the number of days in the billing cycle.
  • Adjusted Balance is the method that’s usually best for the cardholder, since it gives them a chance to pay their bill before finance charges begin to accrue. The adjusted balance is figured by subtracting payments and credits received during the current billing cycle from the balance of the previous billing cycle. Purchases made during the current billing cycle are not included.
  • Previous Balance is the amount the cardholder owed on the last billing statement. Payments and new charges are not included.
  • Two-cycle Balance may be computed by various methods, involving the last two billing periods.

Miscellaneous Fees – The credit card issuer must disclose any other fees that may be charged to your account.

  • Penalty fees may be charged for a late or missed payment, even if it’s only late by a day. Pay on-line to avoid late fees for last-minute payments. Most card issuers let you pay this way; go directly to the card issuer’s website with your checking account information. Card issuers typically apply your payment the minute you approve it. If you pay through your bank’s on-line bill pay service, it may take up to three days for your payment to go through.
  • You may also be penalized for going over your credit limit. If you realize that you mistakenly went over your credit limit, check with the card issuer right away; some issuers may forgive you if you pay the over-limit amount before the end of the current billing cycle, but some will charge you that fee if you’re over your limit even for a day.
  • Cash advance fees are usually a percentage of the advance; about 3% is pretty typical. This fee is in addition to the interest charge for cash advances. Many card issuers charge a significantly higher APR for cash advances, when compared to the purchase APR, unless cash advances are part of their low-interest introductory program.
  • Balance transfer fees also tend to run about 3% of the transfer amount, but a few issuers do not charge a balance transfer fee.
  • Any other fees that may be charged for transactions must be listed.

The basic information will be found in that chart-form listing called the Schumer box, but also read the tiny print that follows it. They may have other information regarding state-specific laws, perks and rewards, special situations, how the payments are applied, terms of specific types of transactions, or other pertinent details. This will usually be a limited explanation of the card issuer’s terms and conditions, and you won’t get every specific detail until you actually open your account. With your new credit card, you will receive a pamphlet called the Cardholder Agreement. Read and understand your Cardholder Agreement; it is a contract. If you there’s something you don’t like in that contract, don’t use your card and close your account.

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