Overview of Credit Card Terms & Conditions
Every credit card has a different set of terms and conditions. Various fees and charges can be applied to your card-- and that's what determines the cost to you. Below are are some of the fees that could cause the cost of owning your card to rise.
Annual Percentage Rate
The APR is a measure of the cost of credit, expressed as a yearly rate. The issuer of your credit card must disclose this information to you before you open your account. The card issuer also must disclose the periodic rate, which is the rate applied to your outstanding balance to figure the finance charge for each billing period.
Grace Period
A grace period is the period of time, usually one month, in which you are allowed to avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a grace period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you’ll have enough time to pay.
Annual Fees
Many card issuers charge annual membership or participation fees that can range from $25 to $100. Try to avoid cards with these fees. There are plenty of cards that offer the same options with no annual fees.
Transaction Fees and Other Charges
Cards may have other costs related to cash advances, making late payments, or exceeding your credit limit. Avoid these fees at all costs. Unnecessary fees such as these will greatly increase the amount owed on your cards.
Balance Computation Method for the Finance Charge
If you don’t have a grace period, or if you expect to pay for purchases over time, it’s important to know what method the issuer uses to calculate your finance charge. This can make a big difference in how much of a finance charge you’ll pay. Examples of balance computation methods include the following:
- Average Daily Balance
This is the most common calculation method. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the "average daily balance." - Adjusted Balance
This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included. This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount. - Previous Balance
This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges. - Two-cycle Balances
Issuers sometimes use various methods to calculate your balance that make use of your last two month’s account activity. Read your agreement carefully to find out if your issuer uses this approach and, if so, what specific two-cycle method is used. If you don’t understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements. Be aware that this method is usually the most costly of the calculation methods.
Other Costs and Features
When shopping for a card, think about how you plan to use it. If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR, if there is a grace period for purchases. However, if you use the cash advance feature, many cards do not permit a grace period for the amounts due — even if they have a grace period for purchases. So, it may still be wise to consider the APR and balance computation method. Also, if you plan to pay for purchases over time, the APR and the balance computation method are definitely major considerations. You’ll probably also want to consider if the credit limit is high enough, how widely the card is accepted, and the plan’s services and features.
TIPS FOR OBTAINING AND USING CREDIT CARDS
Just as you would pay more for insurance on a bad driving record, you can expect to pay more for your credit cards with bad credit. If your credit is less than perfect you'll pay more through assorted fees and charges. Your access to better cards will be limited. Here are some ways to get the card you want and to keep your credit costs down:
- Tip #1: Pay all your bills on time. When you get delinquent you won't have access to better cards.
- Tip #2: Shop for low APR cards but read the fine print on the offers--the low introductory rate period may be short and the "teaser rates" may end quickly.
- Tip #3: Get the lowest ongoing APR you can. This is where following tip #1 will help out. It is best when you can get a low rate that is fixed.
- Tip #4: Check to see if the card you want allows a grace period for cash advances as well as for purchases.
- Tip #5: Shop for a card with low- or no annual fee.
- Tip #6: Consider transferring an existing balance from a high interest rate card to a new lower interest rate card.
- Tip #7: Avoid over-limit fees by watching your charge totals. That's a no-brainer, but it's common.
- Tip #8: Pay for purchases as close to the billing date as you can, and still be on time. This avoids interest charges. Always get a card with a grace period.
- Tip #9: Always monitor your credit cards. Know exactly where you are on credit limits, billing dates and payments due. It's easy to forget to mail a payment. But it's also quite easy to get overextended. If that happens you'll find that your interest and miscellaneous fee charges can get bigger than your minimum payment due.