Consumer Comeback Blog

Understanding the Terms of Your Credit Card

Written by Jeffrey Trull

credit-terms-agreementLike anything that comes with pages of fine print, credit card terms are complex and difficult to understand. But, thanks to regulations and changes in the industry, understanding fees, interest charges, and your statements is easier than ever before.

While these charges are meant to take the mystery out of credit cards, it’s still not always easy to get it right. Here are basic terms, definitions, and other facts you need to know to understand how to properly use your credit card.

Interest Rates

You need to read the fine print to see what annual percentage rate (APR) you’ll be charged and when, since it can vary depending on different time periods or actions you take. And don’t forget: APR is the interest rate charged per year, so you’re monthly interest will be approximately your APR divided by 12.

There are three main types of interest rates:

  • Introductory. This is the rate you’ll be charged during the introductory period of a new credit account. As a promotion, many cards offer 0% introductory APR rates for a set period of months. During this time you won’t have to pay any interest on your balance, although you’ll typically still need to make the monthly minimum payment.
  • Purchase. This is the standard rate you’ll pay on your card for purchases, either right away or once the introductory period ends. It’s helpful to know what this rate is and when it kicks in or you will start paying interest on your balance at median APRs of between 12.99% and 20.99%, according to a Pew Health Group study.
  • Penalty. This is the rate you’re charged if you’ve incurred some sort of penalty that lies within your card agreement, like a missed payment, and allows your card issuer to up your APR. According to the Pew Health group, the median penalty rate hovers around 29.99%.

How Credit Card Interest Is Calculated and Assessed

Interest is technically charged from the date of purchase. However, you’re not charged any interest if you pay your statement balance in full by the due date.

Credit cards come with a grace period of at least 21 days, by law, from when you’re billed to when interest will be assessed. After the grace period ends, you’ll be responsible for paying interest on any balance that you did not pay off before the grace period ended.

Interest is typically calculated based on your average daily balance during the billing period. This is simply the sum of your daily balance on every day of the billing cycle divided by the total number of days. The average this calculation yields is then multiplied by your monthly interest rate.

Statements

You’ll receive a statement, either by mail or electronically, each month that contains much of the payment information listed below. Make sure to read over your entire statement each month to make sure all the information is correct, that there are no fraudulent charges, and ensure that you’re making the proper payments on your account.

Payments

There are several important values and dates that come into play regarding credit card payments that you must make.

Due date

Your monthly payments are due on a certain date, or you’ll incur late fees and/or interest. The due date must be at least 21 days after the billing period ends, and your due date is typically on the same day every month.

You need to make sure you pay by the due date or you may be charged a late fee and pushed into the penalty interest rate. Your credit score will also suffer damage whenever you make a late payment.

Minimum due

Unless your balance is zero, you’ll typically owe a minimum payment every month. This amount may be a small amount, but is still required to avoid late fees.

New balance

If you’re carrying a balance on your card from month-to-month, your bill will display your new balance as well as your outstanding balance carried over from previous months.

Credit limit

Just about every card comes with a credit limit, which is the maximum balance you can charge to your card at any one time. Be sure to see what credit limit you’ve been awarded when your card is issued to avoid a rejected charge or additional fees if you attempt to go over this limit.

Fees

Fees come into play with credit cards in a variety of ways. Here’s a sampling of a few that you’ll want to avoid.

Annual fee

Some cards come with an annual fee that’s simply a flat charge each year your account remains open. It’s typically not worth it to obtain a card with an annual fee unless you have a specific and valuable reason for doing so, like a perk or reward that comes with the card. Unless you do, stick with one of the many cards that have no annual fee attached.

Late payment fee

If you don’t make your payment before the due date indicated on your statement, you’ll be charged a flat fee for making a late payment.

Balance transfer

Many cards offer you the ability to transfer your balance from another credit card. Card users sometimes do this to pay a lower interest rate on any debt they’re carrying.

Before you transfer a balance, be aware that many credit cards charge a fee when you transfer a balance. This fee can either be a flat charge, a percentage of the amount transferred, or both.

Over-limit fee

Just about every card has a credit limit, as explained above. If you exceed that limit on your card, your bank may charge you a fee. However, this fee only occurs when you’ve authorized your credit issuer to exceed your credit limit. If you don’t make this authorization, your charge will likely be rejected by the merchant when you attempt to use your card.

Lost Cards

Credit cards come with certain protections if your card is lost or stolen and then used fraudulently. When this happens, your liability is capped at $50. You’ll need to contact your credit provider as soon as you realize your card has been lost.

To learn more about the details of a credit card offer you’re considering or for better understanding your bill, visit the Federal Reserve Board’s credit card guide.

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