The Difference In Credit Cards

Maybe you are thinking of applying for a credit card for one reason or another. Before you do, it is very important to read and know what the disclosure page means. Here are the meanings of the most important terms on the disclosure page to help you find the card that is right for you.

Introductory APR (Annual Percentage Rate): This is a low rate that lasts only for a little while. It is there to entice you to get the credit card. You will also see in this section how long the “introductory period” is. Often it is 6, 12, 15, or 18 months. You will notice these cards in the mail immediately because they say something like “2.99% until June 2007!” The better your credit is, the better the offers will be.

APR after the introductory period: This is what your rate will be after the initial time frame is over. Most credit cards have several different interest rates depending on how the balance was initiated.

§ Purchase APR is the rate that you pay when you swipe your card at say, a grocery store and sign your name.

§ Balance Transfer APR is the rate you pay when you transfer a balance from another credit card or loan to this credit card (generally to save money)

§ Cash advance APR is generally the highest rate (often over 20%), it is when you take your credit card to a bank or an ATM and get cash.

§ Default or delinquency APR: the rate you pay if you ever pay this (or sometimes any other) credit card even a few days late.

Each APR will be quoted to you in one of two ways:

FIXED: This means that unless you pay late on your card, your interest rate will never change (unless they notify you in advance).

VARIABLE: This means that your credit card interest can change as often as monthly and it will be expressed as prime + a rate. For example Prime (currently 7.5%) plus 9.99% would be 17.49% until prime rate changed. If the federal prime rate went to 7.75%, your interest rate would then be 17.74%.

Grace Period for the repayment of balance for Purchases: Generally between 20 and 30 days, this refers to the minimum number of days you have to repay a purchase before you have to start paying interest. Example: If you buy a new pot set at Target on May 15, you will have at least until June 3 to pay the balance off before the credit card starts charging you interest. PLEASE NOTE: There are NO Grace periods on Cash advances, ever!

Method of computing the balance for purchases: Will generally be expressed in one of two ways. Both calculations work in your favor while accumulating debt, and in your detriment while paying off debt (Clever, considering that most people spend much more time paying-off than accumulating.)

• Average Daily Balance (including new purchases) This means that if you don’t pay your balance in full every statement, your balance over the month will be averaged and you will pay interest based on the average balance. Example: Your previous balance was $500 and then you buy groceries on week 1 for $50, week 2 for $25, and week 3 for $75. Your average daily balance would be approximately $579 even though your current balance is $650.
• Two-Cycle Average Daily Balance (including new purchases) This works the same as above, but over a two-month period. This can be very bad while paying down a balance. Example: You had a $5,000 balance last month but paid $500 toward the principal. This month your balance is only $4,500, but you have to pay interest on $4,750! Yikes!

Annual Fee: You should never pay a fee just for having a credit card. Don’t apply for cards that charge annual membership fees.

Minimum finance charge: The lower this number is the better, some even have none. It really only makes a difference if your balance is always really small anyway.

Transaction fee for cash advance: Usually about 3% with a minimum and maximum dollar amount listed—ie. min. $5 max $75. This is the fee that you pay just to do a cash advance (in addition to the fact that cash advances begin to accrue interest immediately). Steer clear of cash advances unless your only other option is a high-priced loan. In all my years of banking, I have only seen one credit card with no cash advance fee, and most people don’t qualify for it.

Balance Transfer fee or convenience check fee: Also generally about 3% with a minimum and maximum fee threshold. You are charged this fee if you use this credit card to pay off another credit card or loan or transfer money into your checking account.

You may also notice that some cards offer cash back, points, or frequent flyer miles. You can often even find these “rewards cards” with no annual fees. They are great cards for people who will pay off the card every month, and who won’t be tempted to spend more to get more rewards. For people who are a little less disciplined, they are not worth the extra interest rate that these cards generally carry.