Over the last few decades, the security, convenience, and rewards offered by credit cards have made them a popular cash alternative for many consumers. At the same time, consumers should remember that, as enticing as they may be, credit cards represent a line of credit.
Every swipe and chip insertion adds to your card’s balance — and the balance you accrue on your credit card is a form of debt. Not only will you be responsible for repaying that debt, but you’ll likely be charged annual, maintenance, and/or interest fees for the convenience.
The key to enjoying your credit card’s bevy of features is to know exactly what to expect before you fill out your application. A good place to start is to research the three main features that will determine how much your card will end up costing you.
- The Grace Period Can Help You Avoid Interest
A feature of many credit cards — though not all — the grace period of your credit card is the period of time you have to pay your credit card balance before you are charged interest. For most cards, the grace period extends to the end of the billing cycle (your due date), which is typically 21 days after the bill is issued.
The credit card grace period comes with two main caveats, the first of which is that you must pay off your entire card balance to enjoy interest immunity. If you pay anything short of your full balance, you will be charged interest for the entire statement period according to your average daily balance.
Secondly, the grace period will generally only apply to new purchases made with your card. Any transferred balances, cash advances, or other purchase types will likely start accruing interest right away. Check your cardholder agreement for details regarding the interest structure for each purchase type.
- Your APRs Determine Your Interest Payments
Short for “annual percentage rate,” the APR of your credit card is the number that determines how much interest you are charged for the purchases you make. For example, a credit card with an APR of 17% will charge 17% of a carried balance as an interest fee.
Just as when each purchase type starts accruing interest will vary, how much interest you are charged will also vary by purchase type. Specifically, most credit cards will have several different APRs, including independent rates for new purchases, balance transfers, and cash advances. Details of your card’s APRs can be found in your cardholder agreement.
The actual APR you are offered when you apply for a new card will largely depend on your personal creditworthiness, with the highest APRs going to those who represent higher credit risk. For instance, when looking for credit cards after bankruptcy or comparing poor-credit credit cards, you will likely see much higher default APRs than if you were looking for a prime card with lucrative travel rewards or other perks.
- Credit Cards Can Have a Variety of Fees
Beyond interest fees, which can often be avoided with the right combination of APR knowledge and grace-period expertise, your credit card will come with a variety of other costs and fees that can catch you unawares without the right research. To start, most special services performed by your credit card, such as a cash advance or processing a foreign transaction, may carry an associated fee.
Even if you avoid using extraneous services that come with fees, some of your card’s fees are simply unavoidable. Many consumer credit cards charge an annual fee, for example, which is typically used to cover the card’s extra benefits, such as airport perks or rental car insurance. Other cards, especially those designed for subprime consumers, may also charge monthly or annual maintenance fees. These cards may also require an initial application, processing, or program fee to open your new account.
If you are struggling with your credit card payments. Don’t hesitate to contact a NFCC member agency today! NFCC member agencies are committed to conducting a thorough financial review before presenting all available options. Each session is personalized to your situation.
Byline: Ashley Dull is the Finance Editor at Digital Brands, Inc., where she oversees content published on CardRates.com and BadCredit.org. Ashley works closely with experts and industry leaders in every sector of finance to develop authoritative guides, news and advice articles with regards to audience interest.
*Views expressed are the personal views of the author, and do not necessarily represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.