How well do you understand your credit card agreement?

Credit card debt is one of the most common balances Americans hold, and it can also be one of the most damaging. Unlike student loans, mortgages or auto loans, credit cards are revolving accounts, which allow consumers to continue spending even when they are struggling to make existing payments. But another one of the top reasons many Americans fall into credit card debt is because they fail to understand the terms of their agreement and how their spending behavior impacts their debt.

Lawmakers have made a number of strides regarding credit card disclosures and statements that allow consumers to better understand their accounts. For example, card issuers must now display a graphic that informs cardholders of how long it will take them to pay off their balance in full if they only make the minimum payment. While this information may encourage adults to pay more than the minimum balance each billing cycle, a new study shows consumers still need to be careful when looking over their statement.

The study, conducted by Harvard Business School, tracked the behavior of customers who were given a disclosure statement that provided the difference in overall cost if they paid only the minimum amount vs. the amount they would need to pay to eliminate their balance in three years. The participants who chose the latter option, however, were those who carried the larger balances, paid down their debt more slowly and had lower credit scores. And despite making higher payments, the study found that their balances continued to climb. This is largely because the disclosure did not explain that lenders revise the figure each billing cycle and many cardholders are not aware that their payment amount is being reset.

The same types of misunderstandings may exist when it comes to interest rates, cash advances and balance transfers. Many consumers who don’t read the fine print may be unaware that although their standard interest rate may be a low 10 percent, the rate for cash advances may be as high as 25 percent. In addition, consumers who transfer a balance may benefit from a 0 percent interest rate for a few months, but this rate may not apply to new purchases being made with the credit card.

For these reasons, consumers are advised to always read their credit card disclosure agreement in its entirety. Consumers who understand their card’s terms and conditions may be in a better position to make wise spending and repayment decisions that can shield them from unexpected debt.

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