Before you apply for a credit card, it’s important for you understand the terms and conditions associated with the offer. Each credit card application will include detailed information about how the account will be operated and maintained. Here are some the most important terms to consider.
Annual Percentage Rate (APR): The APR is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before you become obligated to a credit account. There are 2 types of APR plans:
- “Variable Rate” plans allow credit card issuers to change your APR when interest rates or other economic indicators — called indexes, change. They are normally based on the PRIME RATE, the Federal Reserve Discount Rate, or the Treasury Bill Rate.
- “Fixed Rate” plans are not subject to adjustments like variable rates. For the most part, they remain at the disclosed rate. But be aware: issuers reserve the right to change your rate at any time. As long as you’re given at least 15 days notice, your “fixed” rate could change.
Grace Period: A grace period is an “interest-free” period in which the credit card company will waive interest charges. Knowing whether a card gives you a grace period is especially important if you plan on paying your balance in full each month. Without a grace period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted. Luckily, most credit cards offer a 20-25 day grace period.
Annual Fee: Many issuers charge annual membership or participation fees. They range from $25 to $50– or over $100 for “gold” or “platinum” cards.
Transaction Fees and Other Charges: A credit card may include other costs. Some credit card issuers charge a fee if you use your card to get a cash advance, make a late payment, or exceed your credit limit. Some may even charge a monthly fee whether you use the credit card or not.
Balance Computation Method: If you don’t have a grace period, or if you expect to pay for purchases over time, it’s important to know what method the issuer uses to calculate your finance charge. This can make a big difference in how much of a finance charge you’ll pay — even if the APR and your buying patterns remain relatively constant.
Examples of balance computation methods include the following.
- Average Daily Balance: This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period.
- Adjusted Balance: This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included. This method gives you until the end of the billing cycle to pay a portion of your balance and avoid interest.
- Previous Balance: This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included in this number.
- Two-cycle Balances. Issuers sometimes use various methods to calculate your balance that make use of your last two month’s account activity. Read your agreement carefully to find out if your issuer uses this approach — and, if so, what specific two-cycle method is used.
If you don’t understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements.