Credit Cards: Beware the Fine Print
Think you understand how your credit cards work? Think again. Most cardholders have only a vague idea of the actual terms they agreed to when they signed up. And that ignorance can cost them a lot of money — even if they pay on time each month.
Here are some quick tips for getting a handle on just what your credit cards are all about:
Know the types of cards you have
Different cards come with different features and advantages. When making a purchase, don't just whip out the first card you see in your wallet.
Tip: If you're planning to carry a balance month to month, use the card with the lowest interest rate (APR). If you pay off your balance each month, choose a "no annual fee" card that offers reward points or cash back.
Tip: Avoid a rewards card that charges an annual fee unless you are certain that the benefits you earn will exceed the cost of the card.
Tip: If you are putting a high-priced item on your card, check your available credit first; going over your limit may trigger high fees.
Tip: Routinely check your cards' grace period, which is the number of days between when your statement was prepared and when you must pay to avoid a finance charge. Grace periods can change, so you need to keep paying attention to avoid a surprise charge.
Tip: If you've had a card for a while and start seeing lower-rate offers, phone your credit card provider and request a lower interest rate. In many cases, they will accommodate you just to avoid losing you as a customer.
Read the not-so-fine print
Credit card offers include disclosure statements that are challenging even to experts. Never accept a card offer or a change to your card's terms without understanding what you are getting into.
Tip: Look for the "Schumer box" for any card offer you're considering. This large-type section of the disclosure, named after a senator who championed credit card reforms, summarizes everything from the APR and minimum finance charges to annual fees and grace periods, all in plain language. Use the Schumer box to compare one card offer to another.
Tip: If you don't fully understand the situations that can trigger a change in the card's rate of interest or the maximum possible rate, throw the offer in the trash.
Watch for warning signs
Credit card offers use specific terms that can signal potentially large fees. Pay particular attention to these:
- Universal default. This allows the issuer to raise your interest rate if you're late on any bill that you regularly pay, such as your utility bill — even one with no connection to your credit card
- Double-cycle interest. This provision states that, even though you may be paying your balance in full for a particular month, in order to avoid an interest charge, you need to have paid the previous month's balance in full as well.
- "Fixed" rates. Although you may have been promised a fixed rate, look closer. Sometimes agreements specify that your rate can change at any time with a 15-day written notice.
- Cash-advance fees. Besides paying a variety of fees for the privilege of making a cash advance, you may also begin accruing interest on the cash immediately. Also beware of those "checks" that your credit card issuer sends in the mail; they operate just like a cash advance.
- Balance-transfer provisions. Read the fine print about so-called low- or no-interest balance transfers. In some cases your monthly payments will be credited toward the low-interest balance first. That can mean that any new charges aren't being paid down at all — though they are accumulating interest at a higher rate.
- Penalty rates. Even the most minor slipups can trigger a huge increase in your interest rate. Such so-called penalty rates can approach 25 percent.
Take the next step...
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