By now, most of us have credit cards and have been using them for a few years. To be totally honest, I never understood the mechanics of credit cards until fairly recent. If you’re looking to apply for a new credit card you should become familiar with how credit cards work. After you read the appealing credit card offer, turn it over, read the fine print on the back, and check out the following:
Annual Percentage Rates
Will the real annual percentage rate please stand up? Most credit cards offer an appealing introductory a.p.r. But, beware because most credit cards carry variable rates. Let’s use an introductory a.p.r. of 9.99% in the following example. You are offered a card with a 9.99% a.p.r., but the fine print on the back of the offer reads: “9.99% or PRIME plus 2.74%, whichever is greater”. Well, if you know that Prime rate is currently 7.5%, then 2.74% + 7.5%=10.24%, which happens to be greater than the 9.99% a.p.r. you thought you were getting. You can always find out the prime rate on www.bankrate.com.
You should also note that a.p.r.’s apply differently towards purchases, balance transfers, and cash advances. Read the fine print and make sure the introductory a.p.r. lasts as long as the card offer suggests. There may be a caveat! You may have to make some additional purchases for the extended time to apply to the introductory rate.
Don’t forget about the default a.p.r. It will bite you in the rear end every time you miss a payment. That low introductory a.p.r. may sky rocket from 10.24% to 29.99%. Read the fine print!
Another note of caution: There is wording in every credit card agreement that states that your rate will increase if you miss a payment on ANY card agreement or with any creditor. This means that if you’ve never missed a payment on that Discover card, but you have missed payments on that Express card, your Discover a.p.r. may skyrocket. It doesn’t seem fair, but that’s the way it is. Your credit card company does a credit check on you.
A grace period is the amount of time you have to pay your balance in full without incurring a finance charge. Most cards provide a 20 day grace period. Some have a 25 day grace period. The longer the grace period, the better for you.
Balance Calculation Method
It is best to get a credit card with an average daily balance calculation instead of the two- cycle average daily balance. Here’s a quick and dirty example of a two-cycle average daily balance. You make $1,000 of purchases in January, but you only paid off $800 within the grace period. As a result, you carry a balance of $200 into February. Instead of being charged interest on the remaining $200 you owe, you are being charged interest on the entire $1,000 since you did not pay off the entire balance from January. That’s not fair, is it? Tell it to the judge because that’s how credit card companies make their dough.
Always know what fees you are being charged. Check out the late fees and the over-the-limit fees. Most late fees are as much as $39. Cash advance fees may be 3% of the amount. Balance Transfer fees will be treated as purchases, so a higher A.P.R. may apply.
To all my globetrotting friends, you may be charged a 1-3% sales charge for all items purchased outside the U.S. of A. Read the fine print.
How Payments are Applied
Lastly, learn how payments are applied to your balance. Payments are applied to fees and charges first, this includes finance charges and the fees discussed above. Afterwards, the payments are applied to balances, what you actually purchased. You should note that balances with the lowest a.p.r.’s are paid first. I wonder why? Consider this: You make $1,000 of purchases and take out a $900 cash advance. The cash advance a.p.r. is at least 23% (hypothetically); meanwhile the purchase a.p.r. is 10.74%. While the purchase balance is slowly being chiseled away with every payment, the cash advance balance is growing larger because your payments are being applied to the balance with the lowest a.p.r. That’s underhanded, isn’t it?
Learn to read the fine print. Once you’ve mastered the mechanics of a credit card, you will not only use credit more wisely, but you will learn how to beat the credit card companies at their own game by educating yourself.
Do you have any questions? Holler at me or Shay. One of us will be able to answer your questions.
P.S. Remember, everything has beauty—including YOU. It just takes a true D.I.V.A to see it!
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