Credit Cards: Terms Of Agreement
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  1. Credit Cards: Introduction
  2. Credit Cards: A Brief History
  3. Credit Cards: What Are Credit Cards?
  4. Credit Cards: Terms Of Agreement
  5. Credit Cards: Types Of Credit Cards
  6. Credit Cards: Making Payments
  7. Credit Cards: Pros And Cons
  8. Credit Cards: Choosing A Credit Card
  9. Credit Cards: Conclusion
Credit Cards: Terms Of Agreement

Credit Cards: Terms Of Agreement

By Brigitte Yuille

Creditors are required to define the terms of using the credit card, and it's imperative that you learn them. Also, know that the creditor can change the terms and conditions at any time as long as you are notified. The rules are presented upfront in the Card holder Agreement, a legally binding document. Despite the importance of what this document contains, however, the fine print may be so tiny you may feel like you need a magnifying glass to read it. Here we cover what you should be looking for.


Annual Percentage Rate
Think of the annual percentage as a way to calculate the cost of credit. It's what you pay the bank for lending you the money shown as an annual percentage rate. So, if your APR is 13.54%, when you divide 13.54 percent by 12 months, you will have a monthly periodic rate of 1.13%.

Average Credit Card Interest Rates

Month
Prime Rate
Subprime Rate
Promotional Rate
January 2009
13.77%
21.67%
2.66%
July 2009
14.99%
22.99%
3.33%
January 2010
15.44%
26.01%
5.77%
Source: CardTrak.com. Based on FICO credit scores, where prime rate = 660-759, subprime = 500-659.


A credit card can charge different APRs depending on the type of transaction, such as when a balance is carried over, cash advance is withdrawn or balance has been transferred from one card to another. Also be aware that if you are offered an introductory APR, it will expire and be replaced by a higher rate. Make note of this so you won't be shocked when the amount rises. (For more on APR, see APR and APY: Why Your Bank Hopes You Can't Tell The Difference.)

The issuer may give you a rate that stays the same and doesn't fluctuate with market conditions, which is known as a "fixed rate" APR. The issuer may also change the APR based on economic indicators or indexes - this is a "variable rate" APR. The indexes used may include the prime rate and Federal Reserve discount rate. Different APR can be charged to different levels of outstanding balances, which is known as a "tiered rate."

Example of "Tiered APRs"

APR
Balance
14%
$1,000-2,000
15%
$2,000-3,000
16%
$3,000-4,000
The credit card issuer must let you know the APR before opening the account, and this information must show up on your account statements. The issuer also needs to inform you of a rate change. Under the 2009 credit card law, issuers must give 45 days advance notice before a rate increase goes into effect.

Finance Charge
The finance charge is what you pay the bank for lending you money. It depends on your outstanding balance and APR.

It's important to determine what computation methods that the card is using to determine the outstanding balance. It can use the adjusted balance, the average daily balance or the previous balance. It may be calculated over one billing cycle or two or exclude new purchases.

Grace Period
The credit card issuer will allow you a certain number of days to pay your balance in full on the due date before tacking on a finance charge. This interest-free time is known as the grace period. It ranges between 20 and 30 days, according to the Federal Deposit Insurance Corporation (FDIC). Finance charges will start racking up when a grace period isn't offered. Most likely, you won't find a card that provides a grace period for cash advances and balance transfers. Credit card issuers may not even have a grace period and if this occurs the finance charges are enforced the date of the charge. (For more on cash advances, see Different Needs, Different Loans.)

Cash Advance
A cash advance offers a convenient and instant loan. It is accessed at the bank, through "convenience checks" offered by the credit card issuer and the ATM. Some ATMs will tack on an additional fee for advances. A cash advance is billed to your credit card most often with a fee and an interest rate that's several points higher than what's applied to regular purchases. The fees are determined based on a percentage, a flat amount or the creditor may combine both. Some ways this can occur is if the issuer charges 20% for an advance but charges a minimum of $10 regardless of the amount of the advance. Another way is if the issuer either charges 20% for an advance or $20, whichever is greater.

Balance Transfer
Balance transfers have been used as way to help reduce credit card debt, but too many transfers can negatively affect your credit score because of the number of credit report inquiries required. They can also become expensive because of the additional fees.

Many companies offer the opportunity to transfer a balance from an old credit card onto a new credit card with the use of teaser rates. These introductory rates can be as low as 0-2%. The introductory period is temporary, lasting between six months to a year. A credit card issuer may drop or reduce monthly finance charges allowing a person the ability to pay down the balance while incurring no or very low interest charges. A fee may be attached for the percent of the balance transferred. However, don't assume you will automatically receive the low interest rate. The offer will depend on your credit history.

Minimum Payment
The minimum payment refers to the lowest amount of money required to repay the outstanding balance in order to avoid defaulting. The amount depends on whether the credit card company believes you are a risky borrower. Paying more than the minimum payment can make the debt less expensive. (For more information on how to pay debt down faster, read Take Control Of Your Credit Cards.)

For example, using the Federal Reserve's Credit Card Repayment Calculator:


Balance
APR
Monthly Payment
Years to Pay It Of
Total Interest Charges
$2,000
19%
$40
22
$4,798
$2,000
19%
$80
3
$567

Fees
The terms and conditions are packed with dozens of terms and phrases and they may include extra fees such as the following:

Annual Fee
This is a fee that varies with creditors for having the account. It's billed annually, typically starting on the day that you opened the account. It tends to range between $18-20 for a regular bank card, but can be much higher for special rewards cards. The fee is often waived the first year.

Over-limit Fee
Not too long ago, if you purchased and item and went over the credit limit your card would be declined. Now, some merchants let the charge go through and add an additional fee for going over the limit. The fee fluctuates depending on the credit card issuer, but it has typically been $30 or more. CardTrak found in 2008 that the average over-limit fee was $35.91.

Late Fee
If you don't get your payment in on time your account is hit with a fee. The average late fee in 2008 was $35.36, according to CardTrak. Credit cards are often using a tiered system for late fees. Basically the more you owe the bigger the late fee.

Example of "Tiered Late Fee"

Balance
Late Fee
$0 - $99.99
$15
$100 - $249.99
$30
$250 or more
$40
Currency Conversion Fees
One of the advantages of using credit cards is the ability to use them overseas. However, conversion fees may apply, and are generally in the 1-2% range. Check with the company before your trip.



Credit Cards: Types Of Credit Cards

  1. Credit Cards: Introduction
  2. Credit Cards: A Brief History
  3. Credit Cards: What Are Credit Cards?
  4. Credit Cards: Terms Of Agreement
  5. Credit Cards: Types Of Credit Cards
  6. Credit Cards: Making Payments
  7. Credit Cards: Pros And Cons
  8. Credit Cards: Choosing A Credit Card
  9. Credit Cards: Conclusion
Credit Cards: Terms Of Agreement
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