Reading credit card fine print for rates, fees and rewards
November 1, 2022 • 15 minute read
True or false
True or false: “No one actually reads the fine print; it all says the same thing anyway.”
Answer: While it may be true that many people don’t read the fine print, those who do will know it is definitely not all the same.
Terms of credit cards, including rates, fees and rewards, all vary. That’s why comparing the finer details is important for finding the best card for you. If that sounds intimidating or boring, don’t worry. It’s easy when you know what to look for.
APR: It’s interest, sort of.
When shopping for loans or credit cards, you’re going to come across the acronym APR. It stands for “Annual Percentage Rate.” If you don’t quite know what that means, that’s understandable. It’s a little tricky because APR refers to different costs in different contexts. For credit cards, APR is usually directly related to interest.
There are several categories of APRs connected to credit cards, and each one applies to a specific set of circumstances and rules.
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.
It’s all about the prime rate.
It's all about the prime rate.
There is one more point to consider when it comes to interest and APRs. Your credit card company might include a disclaimer that says the APRs may vary according to the market based on the prime rate. That means your APR is a “variable rate.” It can fluctuate and change as the prime rate fluctuates and changes.
So what is a prime rate? Generally speaking, a prime rate is the interest rate a bank offers its lowest risk, most creditworthy customers. It’s essentially the best interest rate a bank will give.
The prime rate is an average of individual prime rates. There are several prime rates with different institutions averaging different rates from different banks, but the most important prime rate is the one published in The Wall Street Journal. For the past several years, their published U.S. prime rate was 3.25%, but that number started to climb in 2022.
But how exactly does this number affect you? As the banks’ most creditworthy customers tend to be large corporations with exceptional credit, you, a regular individual, are very unlikely to get a loan or credit card with interest set at the prime rate. Most of us are offered a rate that is calculated by taking the prime rate and adding a specific percentage that correlates to our estimated creditworthiness. As the prime rate goes up or down, individual credit card APRs and other variable loan rates tend to be adjusted accordingly.
Credit card fees: They’re mostly avoidable.
Fees can come as a surprise if you don’t know what to expect, and credit cards have the potential to come with a slew of them. But many of these charges are avoidable when bills are paid in full by their due date. And some fees, like annual fees, balance transfer fees, and foreign transaction fees, can be avoided by choosing cards that don’t have those particular fees, or by not using cards in ways that would trigger fees.
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.
Rewards! (And the rest of the fine print.)
Rewards! (And the rest of the fine print.)
Now, the best part: rewards. Because credit card companies want your business, they’ll do a lot to entice you. They may offer low rates, which is helpful if you intend to carry a balance. They may offer cash back, which is non-taxed money they give back to you. They may offer travel discounts, though some require you to book through their services. Choosing a credit card based on its rewards program is 100% acceptable, provided you understand the full terms and conditions.
And that leads us to the rest of the fine print.
Terms and conditions rarely make riveting reading. Here, you’ll most likely find specific details about interest calculations, fraud protection, and more information on the card’s reward program, including exceptions, exclusions, and all the other times when those rewards don’t apply. But don’t lose heart. This is also where you may find those additional rewards that aren’t frequently promoted. They might include things like discounts on rental cars, emergency road services, or other kinds of travel perks. It’s these smaller rewards that are often tucked into the fine print that many people fail to take advantage of. Unless you read through the details, you won’t know what you’re missing.
Know yourself and your credit habits.
Know yourself and your credit habits.
As you compare cards, think carefully about how you’ll most likely use your credit. Getting a card with a high APR but fantastic travel rewards is not a good fit if you carry a balance and hate getting on airplanes. If you think you’ll carry a balance, go for a low rate or 0% balance transfer. If you pay your bills in full, balance transfers and APR on purchases may not matter to you. In that case, go for the rewards you want. If you do aspire to travel more, you may want a card that doesn’t have a foreign transaction fee and offers a good rewards program connected with an airline that you’ll use.
Anticipating how you’ll use your card will help you separate the average credit cards from the exceptional credit card that’s best suited for your particular needs.
All loans subject to approval.