Credit cards are convenient. But if you don’t understand the terms and conditions of your card, you could easily dig yourself into a financial hole.
If you're in the market for a credit card, you can save yourself lots of money by shopping around and then picking the card with the features that best fit your needs. Read on to learn the terms you need to understand when choosing a credit card.
Credit card companies must disclose the interest rate as an annual percentage rate (APR). The APR is the percentage you’ll pay in interest each year, assuming you carry a balance. Credit card companies charge different APRs and have different terms based on the individual applicant's credit report or score.
Each month, if you haven't paid the balance in full by the due date, the credit card company applies the APR to the account balance to compute the finance charge for that month. (The finance charge is the dollar amount you pay to use the credit.)
Here are some guidelines when considering APRs:
Because federal law—specifically, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009—requires that the APR be calculated in a standard way, it allows you to compare the cost of credit among different credit card companies using a single yardstick. The APR is the best indicator of the actual interest you will pay. If different APRs apply (for example, to balance transfers or cash advances), the credit card company must disclose those as well.
If a credit card company offers you a card with a less than stellar interest rate, it might be required to give you information about its decision. In any event, you can ask the credit card company why your APR is so high, and you can always get your credit report and figure it out yourself. Armed with information, you will be in a good position to figure out what you need to do to improve your credit history and get a better APR down the line.
A “grace period” is the interest-free period of time between the purchase date and the bill due date. It is usually available only to those who don’t carry a balance. If you pay your bill in full each month, make sure you have a grace period. If there isn’t a grace period, you'll pay interest from the date of your purchase. (Learn more in What is a Credit Card Grace Period?)
Grace periods generally don't apply to cash advances or convenience checks, which begin accruing interest right away, often at a higher rate than purchases.
Different credit cards calculate finance charges in different ways, like by using the daily balance method, adjusted balance method, previous balance method, or average daily balance method. A credit card offer must explain which method the company uses to calculate the balance on which it applies the APR.
Credit cards often charge various fees.
Some credit card companies charge you a yearly flat fee—in addition to interest and other charges—for using their card. Some don't. If you pay off your balance each month, you probably want a card without an annual fee. If you carry a balance, a card with an annual fee but a low interest rate might be less expensive than a card with no annual fee but a high interest rate.
The company must disclose any fee that's imposed for using the card to make purchases, balance transfers, or cash advances.
Other fees charged might include over-the-limit fees and penalty fees.
Over-the-limit fees. Under the Credit Card Accountability and Disclosure Act of 2009 (also called the CARD Act), the card issuer must get you to opt in to charge over-the-limit fees. This means you agree to allow the card company to authorize transactions that will put your account over the limit, and then charge fees. To avoid these fees, don't opt in to this provision. You might have to be careful not to accidentally opt-in. For example, a credit application might have a box to check or a line to initial or sign that is really an agreement to allow over-limit transactions.
If you do opt-in, the company can charge over-limit fees. The CARD Act places some limits on those fees. The company can only charge you one over-limit fee per billing cycle, but it can charge for the same over-limit transaction in a total of three billing cycles if you don't bring the outstanding balance below the limit before the bills are due.
Not sure if you might have opted-in by mistake? If you opt-in, the company must provide a written statement confirming you agreed to let them process over-limit transactions. You can revoke this agreement at any time.
Penalty fees. Many credit card companies charge penalty fees for late payments and payments returned for insufficient funds. The CARD Act limits these fees to the actual amount the violation cost the company, or to a maximum of $28 for the first violation and $39 for a second violation if it occurred within six billing cycles of the first violation (2019 figures).
Virtually all credit cards charge higher interest rates for cash advances.
With some cards, if you make late payments, the company imposes a new, much higher interest rate. If you think you might pay late once in a while (be realistic), check out these interest rates.
When shopping for a new credit card, be sure to look for a card that matches your needs. For example, if you think you might carry a balance, look for the card with a low APR even after any introductory rate expires. If possible, get a card with a fixed rate rather than a variable rate. If you sometimes pay late, compare fees for late payments. Avoid cards with high start-up, annual, or other periodic fees, and, of course, don’t agree to allow over-the-limit transactions.
A number of websites compare credit card features and offer side-by-side comparisons of different cards. Keep in mind though that these websites don’t compare all cards available, and some might only include cards that have paid a fee to be on the website. If you find a card that looks good, check the card’s website to read the actual terms and conditions.