Your shiny new credit card arrives in the mail. Do you pull it out of the envelope, activate it and shove the accompanying card information in a drawer?
It's common to make that mistake, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies.
“Most consumers never look at the fine print, and it can be disastrous,” he says.
When you open a credit card, you enter into a contract with the credit card company, and the terms and conditions tell you what to expect, Jones says. Consumers should first read and compare the terms and conditions when shopping for a credit card, Jones says. After choosing a card, consumers should read the detailed cardholder agreement that arrives in the mail with the card.
Because the fine print can be rather lengthy, here are eight vital points to look for.
1. The purchase interest rate: It's important to look at the purchase interest rate – the annual percentage rate (APR) you'll be charged when you buy items with your card and carry a balance, says Jana Castanon, community outreach coordinator for Apprisen, which offers credit counseling and debt management.
The catch is that issuers will often set your rate based on your credit history, so you won't know your purchase APR until after you apply for and get the card, Castanon says. You'll also want to check the cash advance interest rate — the higher APR you'll be charged if you use your credit card to get money from an ATM or bank, Jones says.
2. The penalty interest rate: Even if you always pay your bills on time, look at the penalty APR. This is the higher rate your bank can impose if you fail to make the minimum payment on time, go over your credit limit or make a payment that gets returned. The fine print should spell out exactly what triggers a penalty APR and how long it stays in place, Jones says, and the company must give you 45 days' notice before the penalty APR kicks in, according to federal law. Many consumers have no idea how high their interest rate can go and how much extra they can end up paying because of one or two mistakes, Jones says.
3. The annual fee, if there is one: If the card has an annual fee, it will be spelled out clearly in the terms and conditions. Annual fees tend to be more common on rewards cards and can range from less than $100 to $500 or more, depending on the card.
In some cases, the annual fee will be waived for the first year after you open the card. Make note of what the annual fee will be after that year — and when exactly you'll need to pay it.
4. Transaction fees: Using your card can sometimes cost you. Make sure you know when, so you won't be surprised after making a transaction, says Castanon. For example, foreign transaction fees of as much as 3 percent of the purchase price, tacked onto credit card purchases made abroad, often surprise consumers. Other common transaction fees include those for cash advances, balance transfers and wire transfers. All of these fees will be clearly listed in the terms and conditions.
5. Late fees: You probably know that if you don't make your minimum payment on time, you'll get dinged with a late fee. But do you know how much? It's not uncommon for late fees to reach as high as $35. Some issuers charge similar fees for a returned payment. On the other hand, a few issuers waive late fees.
6. Grace period: A grace period is the window of time, usually 21 days, between the end of your billing cycle and the payment due date. If you pay your balance in full during that time, you can avoid interest charges. Grace periods typically apply only to purchases — not to cash advances, which start accruing interest from day one, according to the U.S. Consumer Financial Protection Bureau.
7. How your balance is calculated: Credit card companies use various methods for calculating your balance, which can affect the amount of interest you pay. The most common method is average daily balance, in which the balance on each day of the billing cycle is added up, then divided by the number of days in the cycle. The previous balance method, meanwhile, applies interest to the balance remaining at the end of the previous cycle and then subtracts out any payments and adds in charges you've made.
8. How payments are applied: In some cases, part of your total balance might carry a lower interest rate than the rest. The Credit CARD Act of 2009 requires issuers to apply any amount paid over the minimum to be applied to the part of the balance with the highest interest rate. That applies only to payments in excess of the minimum, however. Your issuer can still allocate your minimum payment however it wants. For example, a purchase APR might apply to part of your balance and a cash advance APR to the remainder. Your terms and conditions will tell you how, and in what order, the credit card company applies your minimum payment to the lower- and higher-interest balances, Jones says.
Credit card terms and conditions can be difficult to understand, and Jones says consumers who need help making sense of the documents can set up a free session with a credit counselor who can help.
“Understanding your contract is key,” he says.