| June 5, 2013

Understanding credit card terms before opening an account

Comparing various credit card accounts can be challenging when each card’s features differ significantly and individuals are not up-to-date on what certain terms and conditions mean. Understanding language and the lender’s policies are crucial to avoiding credit card debt in the future or taking on a card that offers little in terms of value and services. Brushing up on common terminology and  being forthright about asking for clarification can help consumers better understand their options. 

One of the first components individuals should examine is the annual percentage rate (APR) attached to their card and determine whether it’s fixed or variable. Fixed rates will remain the same, while variable rates will fluctuate with the market. For those who plan on carrying a balance from month to month, a fixed rate may make payments more predictable. In addition, consumers should steer clear of rates with high APRs, particularly those with rates above 20 percent. While borrowers may always plan to pay their balances in full each billing cycle, life circumstances can change, and carrying balances on high-interest cards can quickly cause debt to snowball.

Speak with the lender about company policies

While most payment information and card features will be laid out in the contract, consumers should ensure they fully understand the lender's rules when it comes to fees, late payments and foreign transactions. For example, consumers should ask their lender what constitutes a late payment and the types of fees that may be assessed. Further, some lenders may choose to raise interest rates as a result of late payments, although they are required to give consumers 45 days notice before doing so.

Other often overlooked fees that may come back to bite individuals are foreign transaction fees. A recent U.S. News and World Report article noted that in some cases, borrowers do not have to make a transaction overseas to be hit with a charge. Some companies may consider an online purchase from a foreign company to fall into this category, which can result in heavy charges. 

Lastly, consumers should also ask their lender about the grace period applied to their account. Failing to understand the amount of time they have between payment deadlines is crucial to avoiding late charges, which can result in fees, interest rate hikes and potential credit score damage. 

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