Most consumers share a dirty little secret: They don’t actually read the terms and conditions when they sign up for a new credit product. If you’re evaluating credit cards, however, spending a few minutes digging…
Most consumers share a dirty little secret: They don’t actually read the terms and conditions when they sign up for a new credit product.
If you’re evaluating credit cards, however, spending a few minutes digging into the details could save you money, help you rack up better rewards and ultimately allow you to choose the best card for your wallet.
“One of the main reasons you should pay close attention to the terms and conditions of a credit card offer is to make sure that you’re getting the most affordable deal and you’re getting the credit product that best suits your needs,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling and U.S. News contributor.
The most important details to look for in your credit card’s terms and conditions are:
— Payment policies
Read on to learn how to decode the fine print before you apply for your next card.
APR stands for annual percentage rate, and it’s essentially the amount of interest that you’re being charged when you use credit. APR is an annual rate, so the amount you pay monthly is a fraction of the APR, McClary says.
Where it gets confusing is that one card may have several APRs depending on the type of transactions you make. The most common one that applies to the bulk of your card activity is the purchase APR. When comparing card rates, that is the one to look at.
There may be different APRs for cash advances and balance transfers. And if you are 60 days delinquent on your payment, that might trigger a penalty APR, which is typically around 28 percent, according to U.S. News research.
One more thing to be aware of is that the APR could change if you choose a card with a variable rate. Even fixed-rate cards are allowed to change rates as long as you are given written notice. Should the Federal Reserve decide to raise interest rates as it did several times in 2018, it could result in an APR increase.
If you have an introductory APR, you should be aware of when it expires, and what the rate will change to. For instance, a card might start off with a zero percent rate for 12 months, but then change over to a double-digit rate once that set period is over.
The bottom line on APR: “You have to look at the entire spectrum of interest rates that may be associated to make sure you’re getting the most competitive card based on your qualifying credit score and other conditions,” says McClary. Of course, if you stick to always paying your balance off in full and on time each month, the APR won’t affect you at all, he adds.
— Balance transfer fees. When you move money from one account to another, cards tend to charge a set fee or a small percentage of the total balance, says Rachel Kampersal, marketing communications and programs associate at American Consumer Credit Counseling, a nonprofit credit counseling agency. In most cases, the fee is 3 to 5 percent of the balance transfer amount or between $5 and $10, whichever is greater.
— Penalty fees (late and over-the-limit). “If you miss a payment, you’re in danger of paying an additional fee as a penalty for not keeping up with your obligation. They’re usually around $36. Ideally, you should never pay a late fee, but instead to use it as an incentive to not miss a payment. A fee may apply when you go over your credit limit. However, you typically have to opt in to over-the-limit coverage. “That’s a significant risk to the lender. It indicates that your debt is going beyond your control,” says McClary.
— Cash advance fees. If you’re withdrawing money from an ATM with your credit card or cashing in a convenience check from your credit card issuer, you’ll usually incur a cash advance fee. Typically, it’s between 2 and 8 percent of the total withdrawn, with a minimum fee of $5 to $10. You’ll typically face interest charges with no grace period and a higher cash advance APR than your card’s regular APR.
— Foreign transaction fees. If you travel abroad, you’ll want to see if a foreign transaction fee — usually around 3 percent — applies and under what conditions you may be hit with them, says McClary. “Some cards waive foreign transaction fees, so if you are a frequent traveler, that can be a significant benefit for you.”
You should never pay interest if you can help it. In order to do that, it’s important to know the length of each billing cycle and how long the grace period is. The grace period is the number of days you have to pay your balance in full before interest accrues, says McClary. “Most credit cards will have a billing cycle somewhere around 28 days,” he says. However, he notes that grace periods vary by issuer.
Card issuers are actually not required to have a grace period at all, but if they do, the Credit CARD Act of 2009 mandates that it must be at least 21 days long.
If you’re shopping around for a rewards credit card, there are a lot of terms and conditions to consider, says Kampersal. “They do tend to be very specific,” she adds. For instance, earnings might vary depending on the type of purchase you make, whether it’s groceries, travel, dining or gas.
With travel cards, it can get especially complex if you plan on transferring miles to partner travel programs. Issuers have specific rules for how you can perform rewards transfers. Plus, there may be conditions such as how much you need to spend to earn a sign-up bonus, and whether earnings on bonus categories are capped quarterly or annually.
Another big rewards card condition has to do with redemption, or the ways in which you are able to cash in your earnings. “You want to make sure the rules aren’t too restrictive,” says McClary. For example, some credit card rewards programs require a minimum before you can redeem, such as 2,500 points.
Finally, skim through to figure out under what conditions you could lose the value of your rewards, says McClary. For instance, if you default on the account, that might mean you forfeit all the rewards you have earned over time.
Card issuers offer perks from airport lounge access to free rental car insurance and purchase protection. The question is: What do you need to do to unlock those benefits? Will you need documentation, and what are the limitations? For instance, for cellphone protection, you typically need to pay your monthly cellphone bill with your credit card. Or for an auto rental collision damage waiver to apply, you’ll need to use your card to pay for the rental.
Other perks are automatic for cardholders, like purchase security, which covers damaged, lost or stolen purchases. But if you’re trying to get back money from a lost or stolen purchase, certain types of merchandise might be excluded and there could be a dollar limit.
Terms and Conditions at a Glance
If all of this seems too complex to read through, you’re in luck — within every card’s terms and conditions is a standardized table called the Schumer box, which compiles the most important information. It’s named after Sen. Chuck Schumer, D-N.Y., whose legislation helped make this a requirement for card issuers.
“It’s an easy chart that is supposed to simplify terms and help consumers understand facts and fees,” says Kampersal. It includes everything from APRs to grace periods to fees. “If you’re comparing one card to another, it holds a lot of key information.”
What Should You Do if You’re Still Confused?
With so much legalese written into these documents, you should never feel embarrassed about asking questions, says McClary. Don’t hesitate to reach out to the creditor or go online and look for a glossary of financial terms or tools to compare cards. “You can also reach out to a nonprofit credit counseling agency, which is a great resource if you’re looking for an impartial third party to provide advice and guidance on what you’re reading and seeing,” he adds.