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Credit Card Terms & Conditions - Know the Facts

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When you sign up for a new credit card most of us do not read the fine print. We see introductory 0% for 12 months and if we are the type of person who carries a balance this stands out. It can also be an advantage if you have a high balance and a high APR credit card that you transfer to this new card. It could save you hundreds of dollars during the introductory term if you pay down the amount you transfer. The consumer needs to comparison shop to choose the right card and read the credit card terms and conditions. The terms and conditions of credit card issuers differ. There is more than initially meets the eye.

Once you apply for a credit card the lender does a credit investigation and gives you a credit rating. They then accept or deny you credit. If you are accepted you will be asked to sign the agreement outlining the terms and conditions of the credit card issuer. The main information is outlined in what is called a "Schumer Box" and includes:

APR - The interest rated charged for the amount borrowed in terms of percentage per year. This rate can be a variable rate that changes each billing period.

Other APRs

Balance transfer rates, within an introductory period it could be 0% but transfer rates after that period will be stated. That rate could be variable that changes with each billing period.
Cash Advance APRs are usually much higher with rate caps and they also charge fees as high as 3%-9%. No grace period. This is a loan with exorbitant rates.
Default APRs are also higher with rate caps

Grace Period - The amount of time allowed before finance charges (interest or cost of credit) are applied (see also Balance Calculation Method)

Minimum Finance Charges - The minimum amount charged for the card use. (Typically $.50)

Balance Calculation Method - Method used to determine balance including finance charges.

Average Daily Balance (including new purchases) - If balance is not zero, interest is applied to new purchase when they are made, if balance is zero a grace period is allowed before interest is charged.
Average Daily Balance (without a grace period) - Regardless of previous months balance interest is applied to new purchases as they are made.
Previous Balance Method - Interest is only paid on previous balance not on purchases made since your last payment
Two Cycle Average Daily Balance (including new purchases) - Interest is paid on the current balance as well as the previous months balance. A zero balance must be held for 2 months to avoid charges. This method should be avoided by consumers.

Annual Fees - Yearly charge for credit card ownership, not all cards have annual fees

Cash advance Transaction Fee - Cash withdrawal fee, usually a percentage of the amount you withdrew (3%-9%) with a minimum stated.

Late Payment Fees - Penalty fees for payment not made by the due date. This fee depends on your balance.

Some credit cards have an APR that is a variable rate; this means it could change each billing period. Variable rates are tied to an index (Ex: The US Prime Rate) plus a percentage the issuer tacks on.

The Default APR is typically the highest percentage listed in the terms and conditions. At anytime all of your APRs may automatically increase up to your default APR if for any reason you default on your agreements with the card issuer. There is a section in the fine print that states that "Rates Fees and Terms" may change at anytime for any reason. Those reasons include your credit rating, a non payment to another creditor; multiple inquires into your credit and also market conditions. You have to be notified prior to them raising your rates so you have the option to opt out.

Listed in terms and conditions is a statement regarding how they apply your payments, typically it says, "We apply your payments to low APR balances before higher APR balances." This means your savings will be reduced if you make transactions that are subject to higher APRs. If you transfer money from another credit card at no interest for one year or at a reduced APR the issuer will first apply your payments to that transferred amount as all payments are applied towards the amounts that bear the lowest interest on your account. Any new purchases made during this period will be at the stated APR. You should consider taking a look at the low-interest or no-interest balance transfer credit card offers you receive. Even if these offers have an initial balance transfer fee the money saved overall by having the reduced interest rate will invariable outweigh any one-time nominal fee that you have to pay. But, if someone asks you to pay a fee to apply for the balance transfer tell them you will look elsewhere as you should never have to pay money to transfer your balance from one credit card to another. Ask if they will wave the fee. Consider using your new card with the balance transfer only to pay off that transferred debt. Use another low interest card for current purchases.

Do not transfer more that your credit limit to the new card. Do not make partial transfers as then you complicate your objective and end up with two bills. You can request that your credit limit be as high as the amount you need to transfer but if not decline the offer and look for another. Just remember you have to pay down the debt each month to make it worth while.

If you travel out of the country and use your credit card you may not be aware of the fee that is charged when your credit card company has to do the foreign exchange conversion to US dollars. This percentage could be anywhere from 1%-4%. This percentage has to be listed in the Terms and Conditions. There are credit cards that do not charge this fee.

In any financial transaction it is important that you read and understand all of the fine print before you sign your name accepting the terms and conditions. If there is anything that you do not understand you should ask and keep asking until you understand all of the details regarding use of the credit card.

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Scary about payments being applied to low apr purchases first. That should be illegal. Payments should be evenly applied to the entire account. i.e. a blended interest rate should be calculated.

Posted by J_Greenwald on 10/13/06, 03:12 PM

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