Thursday, 7 May 2015

Confused by credit card rates, fees, and rewards?

Credit cards are convenient and common but some can be, well, confusing. If you've ever tried to wrap your head around the interest rates and various fees that a credit card can charge you, not to mention the rewards programs, then you know what we mean.

And like many people, you may find yourself getting offers for a new card almost every day. So how do you figure out which one is the best option for you? Let's dig in to find out—it could save you a lot of money! All the various credit card offers you receive may look different, but they use similar disclosures for many aspects. If you compare them closely, you may be able to find one that gives you the best combination of features and costs for your needs.

Annual Percentage Rate (APR)

This is what you would pay on a yearly basis for your purchases if you didn't pay off your card in full each month. If you're being offered an introductory rate—like zero percent APR for six months—the offer will also show what you would pay after that introductory rate ends. It will have different rates listed, and the rate you'll pay will depend on your overall "creditworthiness," like your total debt, income, and credit score.

These rates may change. Often, the card will have a "variable" rate, which is tied to some other economic "index" such as the prime rate. You also can be charged a higher rate as part of a penalty APR, as we'll explain later in the story.

Be careful with getting into the habit of letting your credit card balance pile up just because you had a low introductory rate. If you have more than one credit card, review their APR rates on purchases and pay off as much as you can on the card with the higher interest rate first.

Balance transfer fees, and interest rates

A balance transfer is when you pay off the balance on one credit card with another credit card. Typically, there is a fee to transfer the balance to the new card, say, 3 percent of the total balance. But rates can vary, so if you're transferring a large balance, you might want to pick a card with a lower transfer rate if the rest of its features are useful you.

Once the transfer is made, you may have an introductory rate on the interest charged on the transferred amount. You'll want to check what rate you'll pay after the introductory period has passed. There is generally no grace period for Balance Transfers. And, carrying a balance on a Balance Transfer, even at a 0% Intro APR, may still cause you to lose your grace period on purchases.

Cash advances

Cash advances allow you to access cash immediately and can be handy in an emergency. But be aware that you will owe interest on the advance immediately after you receive it, so you'll want to repay the amount as quickly as you can. There is typically no grace period for cash advances. And again, carrying a balance on a Cash Advance may still cause you to lose your grace period on Purchases.

Annual fee and rewards

You can be charged fees for a lot of reasons (like making late payments), but the first one to look for is the annual fee. This is the amount charged just for the privilege of having the credit card. Sometimes cards don't have an annual fee, but sometimes they will charge an annual fee—especially if the card is offering perks such as frequent flier mileage reward points, or generous point multipliers on certain types of purchases. You'll need to figure out whether the perks are worth the annual fee. To do this, calculate how much you'll spend generally, as well as within any multiplier category, with that card each year. Then, make sure to check for any caps on the points you can earn. For example, some cards may limit a point multiplier to the first $6000 in purchases at grocery stores. If you were to spend more than that, you may only earn points at the standard rate. Additionally, some credit card companies will restrict those perks when customers make late payments, or do something else to damage their creditworthiness.

Be sure you thoroughly understand all fees before you apply for a new credit card. And, rewards disclosures may not be as similar from card to card. So, be sure to compare annual fees and rewards terms carefully.

Penalty-based APR increases

If you go over your credit limit, are late paying your bill, or one of your payments is returned, the credit card company may increase your APR. Read the terms of your agreement to be aware of anything that could trigger such an increase.

Generally, the credit card company must tell you at least 45 days in advance if they plan to increase your rate or charge you the higher penalty rate. But beware—there are some exceptions to this. If they do give you notice or increase your rate, call to see how long the higher rate will be in effect. Some companies may leave it at the higher rate indefinitely. If you were told that it would only last six months or after you made a certain number of consecutive payments, call after you have met the conditions and ask that it be lowered to the previous level. If there is a penalty-based APR, the credit card disclosures have to show it. But, some cards don't have a Penalty-Based APR. So, if you are concerned about the occasional late payment, you may want to have one of those cards or at least look for a card with a low penalty-based APR.

Credit cards can be a helpful tool in everyday life. But if you know more about how they work and all the costs associated with different cards, you will be in a better position to make smart financial decisions.

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