Credit cards are, often, thrust on students in college and high school who are unaware of all of the associated risks. Credit card companies are out to make money and interest is a big part of that.
Before you get a new credit card or cancel one you already have, you should read everything before making a decision. Companies may handle interest fees and other associated expenses different from each card or have various rules for different cards in the same lineup. Before you get or cancel a card look through all of the disclosures thoroughly to identify any small print that may cause you difficulties later.
Here are some of the rules that may be in the disclosure you should look for.
Credit card companies know that when you are comparing two cards the first thing you’ll consider is the interest rate. To hook you in, they may put a teaser rate on their card. This low-interest rate is introductory and will balloon to an unpleasant Annual Percentage Rate (APR) within a couple of months. Most often, the balance at that time will then be charged this higher interest rate, which you will be forced to pay. Not to mention, if you are late during this introductory period, your low teaser rate could balloon to that higher rate immediately. Even if you’re late on payments by one day!
Credit card companies have three methods of computing your finance charge every month: the adjusted balance, average daily balance, and the previous balance.
The adjusted balance uses you previous billing cycles balance and then subtracts payments you have made during your current billing cycle. The result is your monthly finance charge.
The average daily balance calculates your balance for every day of your current billing cycle, then subtracts payments made on these days. When this is complete, these payments are combined and then divided by the total days in your billing cycle. Your monthly finance charge is based on this number.
The previous balance method uses the balance when your new cycle begins, i.e. your previous balance.
There used to be a fourth method called the two-cycle method. This method was outlawed by the CARD act because it could charge interest twice on one debt.
Important to know: The adjusted balance will most often offer you the lowest charge, the previous balance offers charges higher than this, while the average daily balance will offer the highest. Guess which method credit card companies use?
The average daily balance, of course. They are out to get your money, after all. Please stay informed.
In the past, credit card companies charged one interest rate for every kind of purchase you make with a credit card. Now, they may have multiple charges, for instance, one for purchases, another for cash advances, and still another for balance transfer. Not to mention, the charges you get for being late. If you miss your payment by one day, expect and pay a charge. Many cards have no grace period. When deciding on a card, look for more than just the purchase rate, the other rates may be a lot different.
Most company’s interest rates are based on an index, most often, the prime rate. This prime rate changes so your interest rate may be variable. The prime rate looks like this: “Prime + 20%”, though it may have a different number. Variable interest credit cards can have interest rates that change, at times drastically, from month to month, depending on the stability of the prime rate.
In contrast, you have a fixed interest rate card. This is offered by fewer credit card companies than variable interest rate cards. This rate can be stable, especially when the prime rate is rising at a steady pace, quickly. But, you must be fully informed. What are the stipulations to keep this fixed rate? While you can skip the fine print on some things, you should never skip it when getting a credit card. In the fine print, this fixed rate may apply only for a short period of time or it may be replaced with a rate that is much higher than stated if you are late, fall behind, or exceed your card limit. Proceed with caution and ask many questions before signing.
There are a variety of interest rates, and other expenses such as late, over limit, transaction and many other potential fees. Know your fee schedule in and out so you know when these are due and what causes them to be taken. When you’re considering a new card, search the tiny, fine print for information about an annual fee. While some ads may say there is no annual fee, the fine print may show this annual fee has a limited time period. Always look for those asterisks (*) attached to any claims.
Some cards have grace periods while others don’t. If your card does have a grace period, the company must send your bill a minimum of 21 days before the end of the grace period so you will have enough time to pay the balance before you are charged interest fees.
Watch these promotion rates. These are highly prevalent with store cards. They may have a 0% promotional rate, but this only applies if you pay the balance in full before the promotional rate’s limited time period ends. If you don’t pay the absolute full balance before this time period, you could be charged an interest rate on the ENTIRE balance. So, if you get one of these cards, don’t leave a penny unpaid, pay the full amount, always.
BONUS: If you get a credit card mailer in your daily snail mail, look for a disclosure that may be included. This will highlight most of the fees and other information you must know. But, still, read the fine print.
Finally, credit cards can be a great way to build your credit score and get money when you need it, but be selective and read everything.