The two most important factors when choosing a credit card is the interest rates and fees associated with it. Below we have some explanations on both interest rate and fees on credit cards to help the consumer more informed when choosing a particular card to apply for.
The price or cost you pay for borrowing money is called the interest rate. For credit cards, the yearly rate of interest is called the annual percentage rate (APR). On most
types of credit cards, you can avoid paying interest on purchases if you pay your full balance on your account every month.
One credit card may have multiple Annual Percentage Rates. Here are some common APR terms you should know:
1) Different Annual Percentage Rates for different types of transactions. Your credit card will always have a purchase APR--the amount of interest you will pay on purchases. For many cards, you only have to pay interest on purchases if you carry over a balance. Your card likely will also have a different--often higher--APR for balance transfers or cash advances.
2) Your card may have a lower APR during an introductory period and a higher rate after that period ends. This is commonly referred to as the Introductory Rate. Under Federal law, the introductory period must last at least 6 months, and the credit card company must tell you what your rate will be after the introductory period expires. For example, your introductory rate may be 6.8% for the first 6 months and then after go up to 21.2%.
3) Your Annual Percentage Rate may increase if you trigger one of the penalty terms. This is commonly referred to as the Penalty APR. For example, by making a payment that is returned or by paying your bill late.
Normally, your Annual Percentage Rates will be variable or fixed:
1) A APR that is fixed is set at a certain percent and can't change during the period of time outlined in your credit card agreement. The rate can't be changed as long as your account is open, if your company does not specify a period of time.
2) A APR that is variable may change depending upon an index that is outside of the credit card company's control, such as the Treasury bill rate or prime rate. The credit card agreement and application will tell you how often your credit card's Annual Percentage Rate may change.
Credit card issuers may offer combinations of variable and fixed rates, For example, a variable-rate APR that becomes a fixed rate after your introductory period ends. Read your credit card agreement carefully to understand when or if your APR may change.
Many credit card companies charge fees. Make sure that you carefully read your credit card agreement so that you understand all the fees that are associated with your credit
Federal law limits the total fees charged during the first year after you open an account to 25% of the initial credit limit.
Here are some common fee terms to look for:
1) When you apply for a credit card, a application fee maybe charged.
2) An annual fee, participation fee, or membership fee is a charge associated with having the credit card. Some banks and financial institutions may charge you the entire fee once a year. Others companies may charge a portion of the fee each month.
3) When you open a new credit card account, a set-up fee maybe charged.
4) When you use your credit card to get cash at a ATM, a cash advance fee is usually charged. It may be a flat fee (for example, three dollars) or it may be a percentage of the cash advance (for example, three percent of the total amount of cash you requested, plus the applicable ATM fees).
5) When you transfer a balance from one credit card to another, a balance-transfer fee might be charged. It may be a flat fee (for example, three dollars) or it may be a percentage of the transfer (for example, three percent of the transferred amount).
6) If your payment is received after the due date on your bill, a late-payment fee can be charged.
7) If you make a purchase that takes your balance over your line of credit, a over-the-limit fee might be charged. Under new Federal Reserve Board regulations, you must authorize your credit card company to allow you to go over your limit or the company cannot charge you this fee. If you don't authorize your credit card company to permit you to exceed your credit limit, your transaction will most likely be rejected.
8) If you ask for and receive an increase in your line of credit, a credit-limit-increase fee maybe charged to your account.
Your credit card may also offer insurance or debt coverage, often with an associated fee. You should read your agreement carefully to make sure you understand the services offered and any fees.
Common services that may have fees include:
1) Insurance to cover your payments if you become disabled, if you die, become unemployed, or if you encounter other situations outlined in your insurance policy.
2) Debt suspension coverage that puts your payments on "hold." You will still need to pay back the debt after your situation ends.
3) Debt cancellation coverage that cancels your debt, so you won't have to pay back any of your debt when your situation ends.
Card issuers may offer combinations of variable and fixed rates. For example, a variable rate Annual Percentage Rate that becomes a fixed rate APR after your introductory period ends. Read your credit card agreement carefully to understand if or when your APR may change.
Before applying for a new credit card please be aware of the Federal Reserve's New Rules For Credit Card Companies that took effect to protect consumers on February 22 and August 22, 2010.
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