Finance Globe

U.S. financial and economic topics from several finance writers.
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Understanding Credit Card Terms and Conditions

There are numerous credit card companies to consider. You might receive new “pre-approved” letters from credit card companies every week.

How do you know which on is the best credit card choice for you? Many of them have something special to offer, and they will always be sure that the most attractive part of their terms will be in eye-catching bold letters at the top of their ad or offer letter.

It’s a possibility that a card with an extremely low interest rate will have a high annual fee, but you can be sure that the high annual fee won’t be in bold letters at the top. There will probably be an asterisk (*) next to those bold letters, and you’ll have to read the back of the page, and find the small print, to find out the conditions of those attractive terms.

The credit solicitation is written to entice you. But to make an informed decision, you must read all the terms and conditions of any credit offer you’re considering.

The basic terms of that card will be found in the “Schumer Box” - required, by law, to be included with any credit solicitation.
Annual Percentage Rate (APR) - The cost of credit expressed as a percentage (includes interest rates and fees). The APR can be a fixed rate. If the APR is a variable rate, it will fluctuate with the index it is tied to. The fixed or variable APR can be a different rate for purchases, cash advances, convenience checks, balance transfers, and default.

grace period – The length of time before finance charges begin to accrue, typically 25-30 days. If the entire amount of the debt is paid off on time every month, the consumer can avoid paying any finance charges on purchases. Usually no grace period is given for cash advances, balance transfers, or convenience checks, because they are all considered the same as giving you straight cash.

Annual Fee – The amount you will be charged yearly for keeping your credit account open. There may be no annual fee or it can amount to over a hundred, depending on what type of card you get and the benefits that come with it.

Minimum Finance Charge – The least amount of interest you will pay if any finance charge will be due. Often this charge is $1.00; if you have a really low balance, it’s not worth it to the credit card issuers to maintain your account for mere pennies.

Balance Calculation Method – There are several ways credit card issuers can compute how much you will pay interest on:

Average Daily Balance is the most common method. Credit card issuer will take the total balance each day and subtract any payments or credits. New purchases may or may not be added, depending on your plan, but cash advances are typically included. Then the daily balances for that billing cycle will be added up and divided by the number of days in the billing cycle to get your "average daily balance."

Adjusted Balance is usually the best for the consumer. Your balance is determined by subtracting payments and credits received during the current billing cycle from the balance at the end of the previous billing cycle. Purchases made during the current billing period are not included. This method gives cardholders time to pay their bill before finance charges begin to accrue.

Two-cycle or double-cycle billing is no longer allowed since changes in the law through the CARD Act of 2009.

Previous Balance is the amount you owed at the end of the previous billing period. Payments and new purchases are not included.

Credit card issuers are required to disclose any other fees that may be imposed:
Over limit fees may be charged if you go over your credit limit by any amount. Changes brought about by the CARD Act made it a requirement that you opt-in to be able to go over your limit (and be charged the applicable over-limit fees). If you do not opt-in and attempt a transaction that would take you over the limit, it will be declined and no fee will be assessed.

Cash Advance fees are usually a percentage of the amount advanced. Also, interest generally begins to accrue immediately - no grace period is given for cash advances, including for convenience checks.

Late Payment fees can be charged if the payment is received even one day past the due date.

Balance Transfer fees may be charged if you use your credit card to pay off other credit. This is typically a percentage of the amount transferred, commonly 3% or so.

Any other fees you may be charged for transactions.

The Schumer Box basically contains a quick summary of terms and conditions of your credit card, but it’s not enough to just pick the one with the lowest interest rate or no annual fee. There is no “one size fits all” when it comes to credit cards. Think about how often you use credit, what you use it for, and how you pay your bills. Then compare cards that offer what you need for your situation.

Things to think about –
Do you ever forget to pay your bills on time? A credit card with no annual fee is great, but if it has a high default APR, you might be charged high interest rates for a long while if you forget to make just one or two payments on time.

Do you always pay your balance in full every month? If so, interest rates may not be so important to you, but you want to be sure to get a credit card with a generous grace period.

Do you always carry a balance on your credit accounts? It may be worth paying an annual fee to get a card with low interest rates.

Will you be paying for perks and rewards that you won’t use? If a card charges extra for a special membership or charges a higher annual fee than others, make sure the benefits are worth that extra cost.

Is there an annual fee? Don’t forget that if there is an annual fee, you will be charged that fee every year whether you’re using the card or not, even if there’s a zero balance. It’s a good idea to go through your credit cards occasionally to decide which ones you actually need and which accounts should be closed. If you plan on using your card very rarely or strictly for emergencies, look for a card with no annual fee - and rewards won't matter since you won't be using the card enough to reap the benefits.

How quick is the issuer to apply the default rate? The credit card issuer may punish you with the default rate if you do not comply with every condition of the credit agreement. This includes making payments on time and staying within your credit limit. The default rate, on top of already hefty fees, can cause credit to cost you a lot more than you had planned.

There will also be other important information in the paragraphs following the Schumer Box; they might concern state-specific laws, terms of certain types of transactions, how payments are applied, how the rewards or perks are handled, or other pertinent details.

However, you will not get the full disclosure until you have agreed to open an account and receive the Cardholder Agreement with your new credit card. By opening the acount, you are agreeing to all the credit card issuer's terms and conditions.

It is important to read the entire agreement, you don’t want to be caught by surprise just because you didn’t take the time to read and understand the conditions of your contract. Educate yourself and know what you are paying for the services of a credit card.

Source: Federal Trade Commission
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Monday, 26 August 2019

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