Credit Card Education Guide

Explanation of the Basic Credit Card Terms

Using a credit card has many advantages, but it is important to know the fees, interest rates and other charges that may be associated with the account. Credit card issuers are required to disclose this information in the credit card applications fine print, however many consumers do not read the terms and conditions, because of unfamiliarity with some of the terms used.

APR

The annual percentage rate (APR) is the interest rate you will be charged if you carry a balance beyond the grace period

The APR depends on the type of balance. A cash advance is usually charged a higher APR than purchases and balance transfers

The APR can be fixed or variable. The credit card issuer is required to inform you in writing if they are changing the fixed rate. The variable rate changes from time to time and no notice is required by the issuer.

Credit card payments must be made on or before the due date or your rate may be increased to the default APR, which is usually much higher than the regular rate.

Grace Period

This is the interest free period. You can avoid finance charges if you pay the balance in full before the due date. It is typically only your purchases that get the benefit of a grace period. Major credit card issuers typically offer a grace period of 20-25 days from the date the credit card statement is issued. Without a grace period the issuer will apply the finance charge from the day the transaction is posted to your account.

Credit Limit

Once your application is approved the card issuer will assign a credit limit that you are not allowed to exceed under any circumstance. The maximum amount that you may charge includes purchases, balance transfers, cash advances, finance charges, and other fees. You may be charged an over-the-credit-limit fee if that happens.

Transaction Fees

There are no transaction fees for the consumer, however for balance transfers and cash advances the card issuer typically charge a 3% fee. This fee could be waived or capped for balance transfers as a part of an introductory offer, which would be disclosed in the fine print on the application.

Method of Computing the Balance for Purchases

Finance charges can be calculated using different methods and some methods may be cheaper than others.

The most used calculation method is the average daily balance. For a statement cycle the issuer totals the balance for each day and proceeds to divide this total by the number of days in the billing cycle and this equals your average daily balance.

Card issuers can also choose to calculate your finance charges using the two-cycle method. This means that even if you paid off last months credit card statement you could end up losing this interest free period if you carry a balance the following month, because the finance charges are calculated using the last two billing cycles.

The credit card holder that carry a balance should look for a card that uses the average daily balance as it will typically end up being the most advantageous calculation method.