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Reading the Terms of Your Credit Cards: Top Things to Look Out For

October 23, 2019

Fifty-six delegates signed the principal founding document of our great republic in 1776—the Declaration of Independence. At 1,458 words, the document has stood for over two centuries as one of the mightiest of all proclamations.

Compared to our nation’s monumental document, a typical credit card disclosure of terms and conditions runs over 8,000 words of dry, unmoving text. But these words count, with a big impact on your personal finances, whether your credit card is from a bank, store, or gas company.

Declare to know your credit card terms and the top things to look out for. 

Annual Percentage Rate

The interest rate you pay the issuer when you maintain a balance on a credit card is the annual percentage rate or APR. Credit card issuers flaunt this number to attract you to their card, which is initially based on creditworthiness such as your income and credit score. The APR also happens to be one of the most important of your credit card terms.

You can find the terms of your credit card and APR on your monthly statement or the issuer’s website. Keep an eye out for changes in your APR. When it changes, it will impact your finances if you carry a balance, and nearly half of all U.S. credit cardholders carry a balance. Issuers adjust your APR following a change in the Prime Rate, a commonly used short-term interest rate in our banking system. If you maintain a balance, a rise in the APR means you’ll pay more interest. Consider using your card less frequently when rates rise or pay the full balance due.

Grace Period

Credit card issuers are happy to provide credit to qualified customers. Credit card debt in the U.S. stands at over one trillion dollars, that’s $1,000,000,000,000.

You can avoid paying interest on your credit card debt if you pay your entire balance by the end of the grace period. The grace period is around 30 days from the end of each month.

Read your terms closely to find out your grace period. Say you purchase $500 of merchandise from May 1st through May 31st. With a 30-day grace period, you have until the end of June to pay your balance in full before interest is charged. Pay your balance in full before the due date and avoid the interest charge. One thing to watch out for is taking cash advances and balance transfers, as some cards do not have grace periods for these transactions.

Penalty APR

Each American credit card holder owes around $5,000 to his or her card issuer. If you do carry a balance, check your credit card terms for a penalty APR. The issuer can charge you this penalty if you are late on making a payment or go over your credit limit. If you do get hit with a penalty APR, it can be shocking—try 10 percent above your regular APR that is then applied to your full balance. The issuer can even stick the penalty APR on your balance indefinitely. What triggers a penalty APR on your card? Know your credit card terms and avoid the penalty. Better yet, be sure to pay on time.

Balance Transfers

You can save money by applying for a new credit card and transferring your current card balance to the new card. This is an opportunity to cut your interest payments, as many cards offer 0% introductory rates on transfers for 12-18 months. You get a nice break from interest charges and an opportunity to pay off your transferred balance. 

Paying off your balance can improve your credit rating, but be careful if you open a new credit card account. Each time you apply for a new credit card, national credit rating agencies run your credit report. Too many of these inquiries can cause your credit score to drop. 

Know upfront the date of the change in the introductory rate and the rate it will rise to. If you don’t pay off your balance before the rate is raised, you may end up paying more interest than if you didn’t make the transfer to a new card.

And there’s the transfer fee that the issuer charges you for bringing your balance over to the new card. These charges can be a fixed dollar amount or a percentage of the balance you transfer. The key is to know the terms before you transfer a card balance. It can save you money.

Cash Advances

Credit cards are considered unsecured debts. That is, you don’t have to put up collateral, like real estate, to back up your debt to the issuer. Why does this matter? Issuers take a risk when they loan you money. In the event you don’t pay them back, the card issuer is out of their loan to you and the interest they would have earned. To compensate the card issuer for taking on these risks, they charge higher interest rates than other types of credit, such as home loans.

When you look at the terms of your credit card, the highest APR is for cash advances. Don’t be surprised if the cash advance rate for your credit card is 10 percentage points over your regular APR. The best way to avoid paying this interest is to avoid taking cash advances. If there’s no other way for you to borrow cash at a better rate, look closely at your credit card terms and find the cash advance APR.

Know what you’ll be paying in interest and fees before you take the cash advance. If you need help calculating how much interest you’ll pay, search for a loan calculator online that will compute the cost of the cash advance. Some issuers even have loan calculators on their websites.

Understanding your credit card terms can have a big impact on your personal finances. Take the time to read and understand the important words and numbers, it can save you money. The fine print counts.

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