We've put together this short introductory guide to credit cards to help you better understand credit card offers and how credit cards work. For example, we'll look at:
- What grace periods are;
- How interest rates are calculated;
- What "hidden" fees you might find in your terms and conditions;
- Why you should look beyond advertised credit card offers;
- How annual fees work;
- And more.
If you want to learn even more after reading this e-book, or if you just want to stay on top of the latest credit card tips, news, and other consumer information, stop by the Credit Card Network blog any time!
Dissecting Credit Card Offers
Before you apply for any credit card, it's important to understand what you see when you look at advertised offers. Things aren't always as simple as they seem.
Let's take a look at some common advertised credit card features you'll come across and how you can dig a little deeper to find out what a credit card offer really includes.
Common Credit Card Features
Here are some of the most common credit card features you'll find emphasized in advertised offers. These are the most likely features you'll be interested in when comparing cards.
- Interest rates on purchases
- Balance transfer offers
- Annual fees
These are definitely important things to consider when you compare credit card offers side by side. But there's more involved than these commonly promoted features.
Advertised Offers vs Full Offer Details
Let's look at the difference between advertised credit card offers and the full terms and conditions that govern your use of a card.
Advertised Offers -- Advertised offers are usually limited in nature. So they focus on features that make a card look most attractive, and they include other basic features or terms that an average consumer expects to find. You might find small print with the offer to further explain advertised rates, but even that fine print isn't likely comprehensive.
Full Terms and Conditions -- Rather than looking solely at advertised credit card offers, it's a good idea to review a copy of the full terms and conditions. This is a longer legal document that lists all terms related to your use of a credit card. In addition to things mentioned previously, you'll find details on other interest rates and fees.
"Hidden" Credit Card Fees
Let's take a closer look at some of these seemingly "hidden" credit card fees that can be tucked away in the fine print.
- Cash advance fees -- This is a flat fee or a percentage of the cash you withdraw from an ATM using your credit card (and is in addition to your cash advance interest rate).
- Late payment fees -- This is the fee you'll be charged if your payment doesn't make it to the credit card company on time for any reason.
- Over the limit fees -- You'll be charged another fee if you go over your credit limit.
- Balance transfer fees -- If you want to take advantage of a great balance transfer interest rate, know that a balance transfer fee might also be charged and it could cut into your savings.
- Foreign transaction fees -- These are fees charged when you use your credit card to make a purchase in another country.
Those are some of the more common examples. But there are others. For instance, you might be charged if you request paper statements instead of digital copies or if you lose your credit card and need a replacement.
While these fees aren't technically hidden as long as you're given access to the terms and conditions before applying, it's up to you to access a copy. You can sometimes find a link to a card's terms on the advertised offer's Web page or online application, or you can call the issuing bank to request them.
Things You Should Know About Credit Card Offers
Now you know what credit card offers include, and you know that you need to look deeper at a card's full terms and conditions to get the real story. But that isn't all you should be aware of. Here are a few additional things you should know about credit card offers before you apply for one.
Qualifying for Advertised Offers
Let's say you find a credit card offer that really appeals to you. In this case let's say the advertised offer boasts a 9% interest rate on purchases and credit limits of up to $25,000.
You meet the basic income requirements and you have a decent enough credit score (in your opinion), so you apply for the card. You're delighted to hear that you're approved. But wait. You then realize you were approved for the card, but not the exact offer you saw advertised.
How could this happen?
As it turns out, the numbers you see advertised can be for the best offer available (basically reserved for those with perfect or near-perfect credit). That means you might actually pay a higher interest rate. You also might be approved for a lower credit limit than the maximum advertised.
It's important to look for clues in advertised offers such as the phrases "up to" or "starting at." These are signs that the numbers you see are just examples in a range. You should be able to find more specific information about available credit limit and interest rate ranges by reviewing the full terms and conditions of the offer.
How Grace Periods Work
Something else you'll learn in your credit card terms is the grace period for that card. A grace period essentially amounts to interest free days between the date you make a purchase and the date your payment for that charge is due.
Let's look at an example in which we'll assume you pay your balance in full every month.
Example: The next closing date of your statement cycle is September 30th. You will have until October 25th to pay that bill. Any charges made in the statement period ending September 30th would not incur interest if the balance is paid before the due date. Those are interest free days. If you do not pay the balance by October 25th, you will accrue interest charges.
It doesn't matter if a purchase is made at the beginning or end of a statement period. Anything within that period is due on the same due date. That means you could receive almost two months of interest free days if you time your purchases properly.
Example: If you made a large purchase on October 1st (a day after the previous statement period closed), you wouldn't be charged interest until the next statement's due date -- in late November.
It's important to note that you won't always be eligible for a grace period. This generally requires you to have a $0 balance at the start of each payment cycle. In other words, you only get interest free days if you paid your previous statement's balance in full by its due date.
Billing Cycles: Understanding When Payments are Due
Your billing cycle is essentially the time between your credit card statements (when you receive your bills). Thanks to the CARD Act, credit card billing cycles are much simpler now than they were a few years ago. In the past your credit card due date could vary from one month to the next. That could make it easier to miss payments and get hit by late charges (and higher interest rates as a penalty).
Under the new rules, your credit card due date is the same date every month. Better yet, if that due date falls on a weekend or holiday, you have until 5:00pm on the next business day for your payment to be processed.
If your credit card billing cycle puts your due date at an inconvenient time (such as the beginning of the month when your rent or mortgage payment is due), you may be able to change it. Call your credit card company and ask for an adjustment. You should be able to propose a date that works for you (other than the 29th, 30th, and 31st as those dates don't fall within every month). This simple act of spreading your payments out could mean the difference between paying all of your bills on time or being charged late fees.
How is Interest Calculated?
Credit card interest calculations can be complicated and confusing. The interest you pay will depend on a variety of factors including:
- Whether you have a variable or fixed interest rate;
- What your balance is;
- Whether or not you are eligible for interest free days during a grace period (based on whether or not you paid the previous balance off in full);
- What your annual percentage rate (APR) is;
- The method your credit card company uses to calculate interest.
For the purposes of an example, let's assume your credit card company uses the common "average daily balance" method to calculate interest.
Example: Let's say you have a fixed 20% APR and a $1000 balance at the start of your statement period. We'll also assume you don't have any interest free days (meaning interest will accrue right away).
You aren't charged 20% of $1000 (which would be $200). Your annual percentage rate is a simplified representation of the interest you would pay over the course of a full year if your base balance of $1000 remained the same. In other words, that $200 would be paid over the course of 12 months.
Average Daily Balance
With the average daily balance method, your interest accrues daily. The credit card company figures out the average balance of your account on any given day of your statement period.
This average is calculated by adding up your balance on every day of that statement period and then dividing the total by the number of days in that period.
If your balance never changed (just to simplify for this example) and you had a 30 day statement period, you would add $1000 per day to get $30,000. You would then divide by 30 days. You get your expected average of $1000. Your daily balance will fluctuate.
Periodic Interest Rate
Next you would figure out the interest rate charged per day (your "periodic interest rate"). You have a 20% annual percentage rate. Divide that by 365 days in the year. In this example, your periodic rate is 0.0548%.
The Final Equation
To find out how much interest you'll be charged for a single statement period, you would simply multiply that period's average daily balance by the periodic interest rate. Then you multiply that by the number of days in the statement period (30 days in this case).
Here's what the end equation looks like:
Avg Daily Balance x Periodic Int Rate x Days in Period = Interest Due
And here is the equation when we plug in the numbers from our example:
$1000 x 0.0548% (which is 0.000548) x 30 days = $16.44
Based on our example, the interest due for this 30 day statement period would be $16.44.
If you don't want to try to crunch these numbers yourself, consider looking for an online credit card calculator to do it for you. Your credit card statement might also give you your average daily balance and periodic interest rate, making it easier for you to check their math.
How are Annual Fees Billed?
Unless you get a no annual fee credit card, you'll be charged a yearly fee for the privilege of using a company's card. This fee can vary widely depending on the perks and rewards the card offers.
It's important to know when your annual fee is due. It's even more important to understand how it is billed. It's tacked right onto your credit card balance. That means you could start off with a balance when your card is approved, even if you don't use it. It also means your balance will increase by your annual fee amount on every anniversary of your account.
Some credit card companies waive annual fees for your first year, making them easy to forget about. If you aren't sure of your annual fee schedule or even if you have an annual fee, call your credit card company to find out before you find an unexpected charge added to your balance.
More to Consider: Perks, Rewards, and Special Kinds of Credit Cards
Previously we looked at some of the most common features consumers pay attention to when comparing credit cards. There might be other important things for you to consider.
For example, some credit cards offer rewards programs. While one card might have a higher annual fee than another, the fee might be justified if you get to earn rewards points every time you use your credit card to make a purchase. If several cards are rewards cards, carefully compare the rewards programs too -- from how many points you'll earn per dollar spent to how many points it takes to earn the rewards you really want.
Along those lines, you should also consider perks. Some cards offer complimentary insurance, airport lounge access, or other attractive extras. These won't outweigh all negatives, but if there are minor differences between the basic terms of two cards, the perks might make your choice much easier.
One more thing to consider is whether or not you want (or need) a specialty credit card. While a simple no frills offer might look good, maybe you really need more. Two of the most common types of specialty credit cards are frequent flyer cards and gas credit cards.
Hopefully you now have a better idea of how fees, interest, grace periods, and more can factor into your new credit card account. If you think you have a good grasp on the basics and you're ready to start comparing actual credit card offers, it's time to figure out where you can find them.
Find and Compare Credit Card Offers
Now that you have a better idea of what to look for in credit card offers, it's time to find some worth comparing. Let's explore a few places where you can find current available offers, and why one method of finding credit cards stands out among the rest.
Places to Find Credit Card Offers
Here are some of the most common places to find credit card offers:
- In your local bank branch (if the bank issues their own credit cards)
- In the mail
- Online ads
- A credit card company's website (all of their offers should be listed there)
- Credit card comparison websites
If you're actively seeking a new credit card, any of these methods for finding offers can work. If you want to work with a specific company, their website is a great place to start. If you love your current bank, you might want to ask them first. But if you don't have a preference, one of your best options is the last one -- turning to a credit card comparison website.
Benefits of Using a Credit Card Comparison Website
Credit card comparison sites make it easy to compare similar cards from different credit card companies. At the same time, you might be able to choose an issuer you're interested in and see all of the cards they currently offer. That makes them flexible.
Here are a few additional benefits of credit card comparison websites:
- It's easier to save money on a new credit card when you can see many offers together. What looks like a good rate on a single offer might not actually compare to other cards currently on the market. These sites can help you quickly spot the cards with the best rates, fees, and introductory specials.
- Credit card comparison websites can save you time. It's like a one stop shop for your next card, and you don't have to waste time manually doing competitive research by digging up offers from each credit card company.
- You can usually access online credit card applications all from one place. That means you don't have to call each company you're interested in or try to find their applications online. Just click the application link when comparing offers and apply online as soon as you're ready.
Basically credit card comparison sites serve as a central hub where you can find all of the information you need to compare credit card offers and apply for your next card, saving you both time and money.
Learn More at CreditCard.net
Whether you're looking for your first credit card or you simply want to understand them better to avoid making financial mistakes, CreditCard.net is here to help. We help you explore the basics and beyond at the Credit Card Network blog. Visit us today to learn more about things like:
- Credit card features
- Credit card news
- Credit scores
- Credit monitoring
- Credit card security
- And tips to help you get the most out of your credit cards
If you want to be a more informed consumer, there's no time like the present. Let us help you navigate the credit card industry so you're never caught off guard and you're always ready to make the right credit decisions. Visit us at CreditCard.net today.