Understanding Credit Card Terms and Conditions

The sad fact is that most consumers simply toss out those privacy statements and changes to terms and conditions that their card issues send. Reading all that fine print and legalese is certainly no fun, but it is the key to avoiding unpleasant surprises in the future.

The fine print is where credit card companies bury the things they do not like to advertise about their offers, like the interest rate for example. While that 5% cash back offer may be touted in bold print on the outside of the envelope, you will need to dig a bit deeper to find that the interest rate charged on revolving balances is 18% or even more. It is easy to see the imbalance in these numbers, and to see why the less favorable conditions lurk in the fine print.

Some of the things to look for the next time you apply for a credit card, or the next time your credit card company sends you a notice, are:

The annual fee
While most credit cards today come with no annual fee, these annual charges are still around, and it is important to look at the fine print and make sure you will not inadvertently be paying one.

Annual fees are most common on airline credit cards, but they are also sometimes found on premium cards, like platinum cards. Sometimes the basic card will be free, but the platinum level will charge an annual fee. If you’d rather have the cash than the prestige, opt for the basic card.

Late payment fees and other penalties

These kinds of fees have been on the rise in recent years, and they now represent a significant part of the income for many credit card companies. It is important to read the fine print carefully to determine the fees charged for taking a cash advance, going over your credit limit and making a late payment.

Calculating the interest
It is vital to know how the interest is calculated on a credit card balance. It is important to understand the various ways banks calculate credit card interest, and what it means to your bottom line. The three basic methods credit card issuers use are:

  • Adjusted balance – this method is not used as much as it once was. With the adjusted balance method, interest is charged on the balance as it stood the day the company mailed the bill.
  • Previous balance – this method charges interest on the balance from the previous billing cycle, no matter how much has been spent or paid since then.
  • Average daily balance – The average daily balance method of interest calculation is the most common method, and it is also the most difficult to understand. With this method, the balance is added up each day of the billing cycle, and that number is then divided by the number of days in that billing cycle. The average daily balance method may be slightly better than other methods for consumers whose balance tends to jump around a lot.

Grace period
Grace periods have been changing in recent years, and not for the better. Many credit card issuers have been tightening up the grace periods on their cards, meaning that the bill is due sooner than it was previously. While 30 day grace periods used to be the norm, many credit card issuers are now shortening them to 23, 21 or even 19 days or less. It is important to know what the grace period is on any card you are considering.

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