Understanding the Terms of Your Credit Card
What’s your credit card IQ? Translate terms with this helpful guide
When it comes to your credit card, how well do you know the terms of your card? What happens if you miss a payment? How is your minimum payment calculated? Are you making the most of your card’s rewards?
Understanding these and other key credit card terms can help you better manage your account and maintain (and build) your credit score.
Here are a few key aspects of credit card terms to know.
- Credit limit. This is the maximum amount the credit card company allows you to charge on your credit card. Stay well below your limit, if you can—around 30% of your total limit may help your credit score over time. Your limit may be increased after you’ve had the card awhile and demonstrated you’re responsible about paying your bill.
- Minimum payment. This is the smallest amount you can pay by the due date and still meet the terms of your card agreement. The minimum payment is just that—a minimum. If possible, try to pay more than the minimum to avoid the extra interest on your remaining balance.
- Cash advance. If you can’t pay with your card somewhere, you might opt for a cash advance. This isn’t a typical charge—it’s using your card to withdrawa cash from an ATM. Be aware that there may be transaction fees and that sometimes there is a higher APR for cash advances.
- Grace period. A grace period lets you avoid finance charges if you pay your balance in full on or before the date your bill is due. A grace period is not an extension of your payment due date.
Interest Rates & Finance Charges
Annual Percentage Rate (APR). The Annual Percentage Rate (APR) is the finance charge or interest rate you pay on purchases when you choose to carry a balance on your credit card. It’s calculated as a yearly rate, so if you want to know what percentage you would pay each month in interest, divide the APR by 12 months. If you have an APR of 24%, the monthly finance charge is 2%.
Take note of whether APR is a variable or non-variable rate. The interest rate on a card with a variable rate can fluctuate up and down, and is tied to an index, such as the prime rate. With a non-variable rate card, the APR is more predictable but can be increased by the issuer after you have had your credit card for one full year.
In general, increases to your interest rate will only apply to future purchases, not your existing balance. But, the APR on your existing balance could increase if:
- You are more than 60 days late in paying your bill
- You are in a workout agreement and you don’t make your payments as agreed
An introductory rate. This is a temporary interest rate that is lower for a designated period of time. Be aware of what your rate will “go to” once the introductory rate expires.
Finance charges. If you’re going to carry a balance on your card, it’s important to know that balance will cost you in finance charges. The two most common methods for calculating finance charges are:
- Average Daily Balance—In this commonly used method, the company tracks your daily balance day-by-day, adding charges and subtracting payments as they occur. At the end of the billing period, the resulting daily balances are added together. Then, the total is divided by the number of days in the billing period to get the “average daily balance.”
- Adjusted Balance—To figure the balance due, the company subtracts payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the current billing period aren’t included in the adjusted balance. This method gives you until the end of the billing period to pay your balance and avoid the interest charges.
Types of Fees
You will probably have some fees associated with your credit card. The most common credit card fees include:
- Annual fee. Not all cards have an annual fee, for those that do—especially premium rewards cards— the issuer may bill your account each year for the credit card.
- Balance transfer fees. When you transfer an existing balance from another card, there may be a fee, which is either calculated as a percentage of that balance being transferred or as a set amount fee.
- Cash advance fees. Some issuers charge cash advances fees, either as a percentage of the advance or set amount fee.
- Foreign exchange fee. Traveling abroad? Check to see if any purchases you make outside of the U.S. come with this fee.
- Late payment fees. Missed your payment due date? You might incur a late fee.
- Over-the-limit fees. If you exceed your credit limit, you might get dinged with one of these. There are sometimes opt-in requirements and limits associated with these fees, so be aware of the terms associated with your card.
- Returned payment fee. If you pay your bill with a check that bounces, your card issuer may charge you a returned payment fee.
Rewards cards let you accumulate rewards when you make purchases on your card. Depending on the type of card, rewards can be used toward different benefits such as travel, gift cards, cash back, direct application of rewards to your balance, or even charitable donations.
It’s important to shop around for a card that fits your needs. When you’re comparing, make sure to look for rewards that are:
- Flexible, or fit your specific needs (cash back, or travel)
- Easily earned and redeemed. You don’t want restrictions that make it difficult to use what you’ve earned.
- Not limited by expiration dates or caps on how much you can earn.
- Worth any other the costs associated with the card, like annual fees or interest rates.
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