Understanding Your Credit Card Agreement
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Have you ever looked at your credit card agreement? Whether you’re a new cardholder or you’ve had your credit card for years, it’s worth a read. Invest some time and energy into understanding your card’s specific terms so you can make sure you have made the best choice for your finances. Using credit cards responsibly is a large part of improving your credit score.
“You’ve just got to read that pesky fine print,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “Get out the magnifying glass and read it.”
If you’re thinking of applying for a new card, you can go online and review a range of card agreements ahead of time to make sure you understand the terms completely. Simply search the Federal Reserve’s database of more than 300 credit card agreements and do a comparison so that you can find the one that benefits you the most.
What follows are some terms you may encounter in a credit card agreement and what they mean for you.
The APR, or annual percentage rate, is the interest rate you will pay each month. It can vary with the market rate, unless it is fixed. Often, there is one interest rate for purchases, another for balance transfers, and yet another for cash advances.
Credit card companies will sometimes offer you an introductory interest rate on either purchases or balance transfers. The idea is to entice you to sign up for the card and make initial purchases or to transfer the balance of another card onto this card. But these rates only last a short time—often just six months—before they jump, so unless you can pay off your purchases or old balance quickly, don’t be swayed by this offer.
Set-up and maintenance fees
These fees vary from card to card. Some cards may charge an annual fee, a one-time set-up fee, a monthly participation fee, or a fee if you want additional cards.
These are usually fees expressed in a percentage and outlined for any transaction other than a purchase. They typically include balance transfer, foreign transaction, and cash advance fees, expressed as a dollar amount or a percentage—or sometimes both. So remember, even if you have a zero-percent APR for balance transfers, you may still pay a fee.
The credit card agreement should outline how many days you have between the close of the billing cycle and the payment due date. This is usually 25 days.
This is the amount of interest you pay if you violate certain terms of the agreement, such as paying late, going over your credit limit, or making a payment that is returned. This rate is normally much higher than your regular APR. If you trigger the penalty APR, your credit card company has to tell you before the new rate kicks in, but the agreement should tell you how long the penalty rate applies and what you can do to go back to a regular rate.
Penalty fees usually include a late payment fee, a returned payment fee, and an over-the-credit-limit fee.
If you are signing up for a rewards card, there are several things to consider. Read the fine print to determine how you qualify for the rewards, how they are distributed, and any limitations the credit card company has placed on them. It is getting increasingly difficult to find a rewards card without an annual fee, so do the math and decide if the rewards are worth it, says Cunningham.
Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.
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