For many people, the day they get their first credit card feels like they’ve finally arrived. After all, credit is one of the perks of reaching the age of responsibility. However, many new card users seem to forget everything charged must be paid. That means a new credit card also represents the potential to dig a very deep hole if they aren’t careful.
A huge part of being careful is knowing what to look for in a credit card agreement. If you don’t understand the terms completely, you could wind up paying far more than you should for the convenience of using the card.
Annual Percentage Rate or “APR”
This term defines the amount of interest you’ll pay on balances on an annual basis. On average, they run around 16 percent. Then again, some issuers charge as much as 30 percent. It’s important to be clear on this before you sign, as it determines how much you’ll pay if you carry a balance from month to month.
You also need to note the categories of APRs attached to the various forms of usage of the card. Some issuers have one APR for purchases, another for cash advances and yet another one for balance transfers. Further, APRs can vary according to the Prime Interest rate set by the Federal Reserve Bank.
All of this is outlined in your card agreement.
The amount of time you have between making a charge and the date interest is imposed upon that charge is referred to as the card’s grace period. It usually starts on first day of the billing cycle and ends a certain number of days after, depending on the credit card issuer. Grace periods are typically between 21 and 25 days.
Some cards carry annual “membership fees” for which you’ll be billed as charges to the card. And yes, these can accrue interest if they aren’t paid off within their grace period. Fees usually run anywhere between $25 and $300, depending upon the issuer and the rewards the card offers.
The key here is to be certain the advantages you’ll enjoy are worth the fees. There are lots of fee-free cards out there, so before you accept any offers make an effort to determine what you’ll get in exchange for those annual fees.
Other fees you may encounter include those for balance transfers (moving money from one credit card to another), foreign transactions and cash advances (withdrawing cash from an ATM using a credit card.
Penalties generally stem from missed or late payments, as well as charging beyond the card’s limit. These take the form of a “penalty APR”, which can advance your 16 percent APR to 29.9 percent or more.
Penalty APRs can make your card balance swell significantly, as they are applied to the entire outstanding balance—as well as the charges occurring after they’ve been triggered.
Keep in mind also that new interest rate will be applied to the new resulting balance each month and feed upon itself if it isn’t paid off. This is how things can get out of hand when you aren’t mindful.
Where to Find Help
The language used in user agreements is notoriously dense. Sites like The Simple Dollar do a good job of explaining the various terms in everyday language. This can be useful when you’re trying to make sense of it all.
If you’re coming up on this information after you’ve experienced hardship and you’re trying to figure out how to deal with debilitating credit card debt, partnering with a company like Freedom Debt Relief can help you work out a deal to make the debt easier to repay.
These firms can often get a portion of the principal debt waived. To find a solid company with which to work, look for articles like these Freedom Debt Relief reviews to get a sense of the reputation of the organization before you sign up with them.
Knowing what to look for in a credit card agreement can save you a lot of money and stress. Take your time, read it through and if you don’t understand something, seek professional help.