Before signing up for a credit card, our credit counseling advice is to understand the terms and conditions associated with each card. Do you really understand what interest rates and minimum payments are, for example? What are the credit card terms for each card that you hold? Fully understanding credit card terms is important – even if they are fully disclosed in solicitations and applications, it’s possible that they don’t mean what you think they mean. Here is a breakdown of some of the most common credit card terms to help you avoid credit problems.
Interest rate is essentially a fee paid for the privilege of credit. Measured annually, it is known as the annual percentage rate, or APR. The APR is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before your account can be activated, and it must appear on your account statements. The card issuer also must disclose the “periodic rate.” That’s the rate the issuer applies to your outstanding balance to determine the finance charge for each billing period.
Some credit card plans let the issuer change the APR when interest rates or other economic indicators — called indexes — change. Because the rate change is linked to the index’s performance and varies, these plans are called “variable rate” programs. Rate changes also can raise or lower the finance charge on your account. If you’re considering a variable rate card, the issuer must tell you that the rate may change and how the rate is determined. Before your account is activated, you also must be given information about any limits on how much your rate may change — and how often.
Minimum payments are the lowest amount you must pay on each credit card per month. However, the leftover unpaid balance is charged interest, resulting in a higher payout to the credit card company over time. To avoid this, don’t pay just the minimum payment. Our debt counselors advise paying the balance in full every month, if you can.
Fees: Many credit cards charge membership and/or participation fees. Issuers have a variety of names for these fees, including “annual,” “activation,” “acceptance,” “participation” and “monthly maintenance” fees. These fees may appear monthly, periodically, or as one-time charges, and can range from $6 to $150. What’s more, they can have an immediate effect on your available credit. For example, a card with a $250 credit limit and $150 in fees leaves you with $100 in available credit. Some issuers charge a fee if you use the card to get a cash advance or make a late payment, or if you exceed your credit limit.
Grace Period: A grace period, also called a “free period,” lets you avoid finance charges if you pay your balance in full before the date it is due. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month. Without a grace 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.
Balance Computation Method for the Finance Charge: If you don’t have a grace period — or if you plan to pay for your purchases over time — it’s important to know how the issuer calculates your finance charge. Which balance computation method is used can make a big difference in how much of a finance charge you’ll pay — even if the APR and your buying patterns stay pretty much the same. Understanding the terms is the best way to protect yourself from getting into too much credit card debt.
- Always be aware of the interest rates, or APR, of each credit card. Many credit cards will offer 0% APR for the first year, but once that year is up, it can jump up to very high percentages.
- Pay more than the minimum payment. The more you pay each month, the less you will pay in interest. If you can pay the balance in full each month, do so – it will save you significant amounts of money in the long run.
- Do whatever you can to avoid paying fees, such as avoiding taking out cash advances or making late payments. This is the best way to avoid paying money to use money.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.