Reading credit card fine print for rates, fees and rewards
Types of APR
APR for purchases defines the interest rate you are charged on items or services you buy. For many credit cards, interest on purchases begins to accumulate on a daily basis after your bill due date. This daily rate is often calculated as 1/365 or 1/360 of the APR.
Imagine you pay the minimum due on your credit card bill, but still have a balance of $100. Let’s also imagine an APR of 21.99%. Every day after the due date, you’ll be charged an interest rate of 1/365 of 21.99%, or .06%. One day later, the amount you owe goes up to $100.06.
“Mere pennies,” you may say, but then the next day .06% is charged on $100.06. The extra addition is another small amount; not even seven full cents. No big deal, right? However, imagine continuing that pattern for weeks, perhaps months. Every day, interest is charged on the initial $100, plus all of the accumulated interested. This is compounding interest, when interest is applied to interest, and you might be surprised at how quickly it can become unmanageable.
The good news is, with most credit cards, you can avoid interest on purchases by paying your balance in full at the end of every billing cycle.
Often, the balance transfer APR matches the APR for purchases, and it works the same way. When you use your card to pay off other debt, interest begins to accrue after the first billing period due date. However, many credit card companies offer promotions with a 0% APR for a set period of time when you open a new account. Taking advantage of a 0% balance transfer promotion might be a good option if you are paying high interest rates on other debt. The 0% APR can give you a reprieve from accumulating interest during the promotional period and help you pay down the principal amount you owe.
A word of caution: A 0% APR on balance transfers doesn’t mean there won’t be other applicable charges. You may be required to pay a balance transfer fee, even with a promotion, so consider the balance transfer option carefully.
APR for cash advances is the interest rate you pay when you draw cash from your credit line. Not only is this number usually higher than the APR for purchases, the interest on cash advances often starts to accrue from the day you take the advance, unlike interest on purchases, which usually has a grace period until the payment is past due.
If you ever need cash from your credit card, try to pay your balance immediately afterward. There’s no reason to wait for the billing cycle to end if you don’t have to. Early payment will help you avoid further compounding interest from a cash advance.
The penalty APR is the APR rate that is imposed as a penalty, usually for a missed payment. It’s often quite a bit higher than the regular purchase APR. Sometimes it’s double. That means a missed payment could lead to paying more than double the interest you would’ve paid if you had made the minimum payment by the due date.
Aside from higher interest, penalty APRs often come with another whammy. Many credit card companies keep penalty rates in place until six months of consecutive on-time minimum payments have been made. Yes, you read that right. If you miss a payment, you might be paying double the interest for six straight months.
In short, missing a payment is expensive. If it happens, you can avoid the worst of the charges by paying your full balance as soon as possible and continuing to make full payments for the next several months.
Types of Fees
While some credit cards come with a yearly fee, many don’t, so it’s quite easy to avoid this charge. And who wouldn’t want that? Well, depending on how you use your card, you might not care about an annual fee because some cards with annual fees have excellent reward programs. Say you’re a frequent flier. If a credit card offers rewards that can save you more on travel than any other card, even when you include the cost of the fee, that card might be worth considering.
The drawback to cards with annual fees is that if you stop using the rewards, the card may no longer be worth the extra charge. Then you’ll be stuck with the decision to continue to pay the fee on a card you don’t want, or cancel your card, which may affect your credit score by lowering your overall credit limit.
Transaction fees include fees on balance transfers, cash advances and foreign transactions. As some of these transactions may also come with additional interest and their own APRs, you could be charged more than once. Even a card with a promotional 0% APR for balance transfers may come with a fee, so be sure to read all of the fine print.
As for foreign transaction fees, you can avoid them by choosing a card that does not include those fees, especially if you anticipate using the card outside the country. If you don’t travel outside of the country, this fee might not matter to you.
Remember that penalty APR that increases the interest charged on late bills? Well, sometimes there are additional fees for late payments as well. At the risk of hitting you over the head, it bears repeating that missing payments gets expensive. It’s bad for your credit, too. Knowing about the extra costs may help you avoid them.