Knowing Your Credit Card Terms

A credit card involves borrowing, and borrowing often has charges associated with it. So before you open a credit account it's important to consider the terms you are agreeing to.

APR - Annual Percentage Rate is a measure of the cost of the card, expressed in a yearly amount. This amount must be disclosed to you before becoming obligated on the account and statements. The issuer of the card must also tell you the periodic rate - the rate applied to the outstanding balance that is used to figure the finance charge at the end of each billing period.

Some APR's are fixed while others are variable. Variable rate programs are usually linked to some type of economic indicater, called indexes, that change periodically. Your rate will then change when these indexes change. Card issuers who use a variable rate must tell you that the rate may change, and how the rate is determined including which index is used and what margin (addition amount) is added to determine what the new rate is.

Grace Period - The grace period is a certain amount of time you have to pay the balance off in full to avoid finance charges. Knowing your grace period will allow you to pay the bill off each month without being charged money to use the credit. If your company offers a grace period they must mail the bill at least 14 days before the due date so you have enough time to pay the bill.

Annual Fees - Some cards charge annual membership fees ranging from $25 to a couple of hundred dollars. With the number of free cards available there is really no reason to pay an annual fee though.

Transaction Fees - Some issuers charge a fee if you use the card for a cash advance, make a late payment, or go over your credit limit.

Balance Computation

Average Daily Balance: This method credits your account from the day payment is received by the issuer. The issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. Cash advances are typically added to the balance. The resulting daily balances are added for the billing cycle then divided by the number of days in the billing period to get the average.

Adjusted Balance: This is the most advantageous method for the card holder. The issuer subtracts payments or credits received during the current billing period from the balance at the end of the previous billing period. Any purchases made during the billing period aren't included. Some issuers also exclude prior unpaid finance charges from the previous balance. This method gives you until the end of the billing cycle to pay on your balance in order to avoid finance charges.

Previous Balance: This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current period are not included. Some issuers also don't include unpaid finance charges.

Other Features - You'll want to consider if the credit limit is high enough, how widely the card is accepted, and other features such as affinity cards (cards where a portion of the annual fees or charges are donated to an institution or even given back to you in cash or travel).

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