If you’re like most of us, you have a relationship with at least one or two credit cards in your wallet. We tend to take credit cards for granted, but how well do you really know your cards? Do you understand how your APR works, for example? The following are some common terms that will help you better understand your relationship and maybe decide which ones you should reconsider.
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This is a fee the credit card issuer charges for the privilege of having their card. The fee is billed once a year and can range from $25 to $200. It is important to understand that not all credit cards have these fees, and those that do will sometimes waive them if you ask or threaten to cancel the card. Sometimes, cards that offer attractive rewards will charge high annual fees for the privilege. Before you sign up for one of these cards, make sure you’d actually get a benefit from rewards or cash back that would offset the annual fee. If you pay $150 in fees for $100 in benefits you’ve wasted your money.
Annual Percentage Rate (APR) – Credit Card Interest Rates
The APR is the annual interest rate that you pay on balances you carry on your credit cards. APRs range from less than 10% to 25% or more. If you have good credit, you may be offered an APR of, say, 12%. But if you have bad or nonexistent credit you may be stuck with a 22% APR. An average credit card APR would be around 15%. The higher your APR, the more quickly any unpaid credit card debt can spiral out of control and the more important it is that you keep up with your payments. If you miss payments, your bank may impose a penalty APR that’s even higher than your regular APR.
The APR works like this: A fraction of your annual percentage rate appears on your statement as a percentage of your unpaid balance at the end of the monthly billing period. You might think credit card companies take the APR and divide it by 12, the number of months in a year. In fact, credit card companies calculate interest on a daily basis, adding up your interest as you spend throughout the month according to a Daily Periodic Rate (DPR). If you don’t pay your bill in full, the interest on the amount you didn’t pay off then gets added to your unpaid balance, increasing the amount that is subject to interest charges the following month if you haven’t paid down your debt. That’s compound interest. Don’t assume that making a “minimum payment” exempts you from paying interest. Unless you pay your balance in full, you’ll pay interest. In many cases, making the minimum payment won’t actually make a dent in your debt. Scary, right?
Many credit cards offer introductory 0% APRs as an enticement to new customers. This can be useful if you’re transferring a balance from an old card to the new card, so long as you can pay off the transferred balance before the 0% APR expires. In some cases, a credit card company will offer different APRs for different kinds of debt. For example, you might get a 0% APR for your balance transfer but pay a 17% APR on new purchases.
Sometimes called your credit line, it is the maximum amount the credit card company is willing to let you borrow (charge) on your card. Your available credit is your total limit minus your unpaid balance. For example, if you have a $2,000 limit and you have an unpaid balance of $750, your available credit is $1,250.
Also referred to as your credit balance, this number is the percentage of your credit limit that you are using. For example, if you have a $2,000 credit limit and an open balance of $1,000, your credit utilization is 50%. This number appears on your credit report, is part of your credit score and is used by other lenders to determine if you are a credit risk.
This is the period of time between when you make a purchase and when the credit card issuer begins charging interest. Not all credit cards have a grace period, which means that purchases may start accumulating interest the day after you make them.
This is the minimum amount you can pay each month on your open balance. Minimum payments are usually 3%-5% of your balance. For example, if your credit card issuer uses 4% as the basis for its minimum charge and you have a balance of $1,000, your minimum monthly payment would be $40.
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Each month your credit card company will send you a statement that lists your new purchases, outstanding balance, minimum payment due and the date your payment is due by. This can be by mail or email.
Found on credit card marketing materials and applications, this box contains a summary of key terms of the credit card offer.
Terms and Conditions
When you apply for and accept a credit card, you are entering into a contract with the credit card company. The terms and conditions are the terms of that contract. They explain what both your and the credit card company’s obligations are.
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