Here are the four must-know features of any credit card.
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Credit card issuers tempt you with big rewards, sign-up bonuses, and perks like purchase protection or travel insurance. The marketing language may sound appealing, but the cardholder agreement can often hide fees and restrictions that limit the card's value and could even cost you money. Here are four things you need to investigate before applying for a credit card.
The annual percentage rate (APR) tells you how much you'll pay in interest if you carry a balance. Some cards have a single APR while others may have separate APRs for purchases, balance transfers, and cash advances. The card issuer may offer a 0% introductory APR to entice new customers trying to pay down credit card debt or enact a penalty APR for customers who pay late.
You don't have to worry much about the APR if you never carry a balance, but it's critical if you're in credit card debt. The higher your APR, the more interest you'll pay and the more difficult it will be to get out of debt. APRs can be as low as 11% or as high as 36%. Typically, people with good credit -- a score of about 700 or above -- pay less than those with fair or poor credit.
Your APR can change at any time and the card issuer isn't always required to notify you, though in some cases you may get a 45-day written notice alerting you to the change. You can opt out, but then the card issuer will cancel your account.
Card issuers are legally required to list all fees in a table at the top of your cardholder agreement. Common fees include annual fees, late and returned payment fees, and balance transfer and cash advance fees. Your card issuer may also charge extra for things like adding an authorized user to your account.
It's important that you understand all potential fees you could incur before you sign up for a card so you don't run into any unexpected surprises. The card issuer could advertise that the card doesn't have an annual fee, but the fine print may reveal that that's only for the first year, and after that, you have to start paying $100 or more annually to keep the card. Then you'll have no choice but to pay it or cancel the account.
3. Reward terms
Rewards programs are what draw most people to credit cards, and if you choose the right card for your spending, they can be lucrative. But most rewards credit cards have limitations that can affect your ability to earn or redeem rewards. The most common limit is a cap on quarterly spending in bonus categories. You may be able to earn 5% on the first $1,500 you spend at grocery stores one quarter, but any additional grocery spending after that point will only earn 1% cash back. Sign-up bonuses also have limitations. You may need to spend a certain amount within 90 days of account opening in order to claim the bonus.
The card issuer might also place limitations on how you can redeem your rewards. Travel credit card miles may expire if unused after a certain amount of time and you may have to earn a certain number of rewards points before you can redeem them at all. Make sure you understand and are comfortable with all limitations on rewards earning and redemption before you sign up. If you're not, move onto another card.
4. Grace period
Your grace period is the length of time between when you receive your bill and when your payment is due. If you pay the balance in full within the grace period, the card issuer won't charge you any interest. But any remaining balance left after that time will begin accruing interest at the rate outlined in the cardholder agreement.
Grace periods used to be 25 days, but some card issuers have shrunk theirs to 21 days or less. It shouldn't matter if you always pay your bill the day you receive it, but if you've been known to cut it close before, you definitely want to keep an eye on the grace periods for any new cards you open.
Where do I find all of this?
There are a few ways to access the cardholder agreement. If you're receiving pre-approved credit card offers in the mail, they probably include a paper copy of the cardholder agreement. You can also find the agreement by navigating to the card's page on the issuer's website. Look for fine print that says "Terms & Conditions" or "Cardholder Agreement." Clicking this link will take you to a copy of the cardholder agreement to look over.
If you're having trouble finding the agreement on the card issuer website, try the Consumer Financial Protection Bureau database instead. Card issuers are required by law to submit updated copies of their cardholder agreements every quarter.
Reach out to the card issuer if you run into questions about anything you find in the cardholder agreement. It's worth a few minutes of your time to avoid misunderstandings and unexpected issues down the line.
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