Understanding Your Credit Card Terms and Conditions

Credit card rules have changed thanks to the Credit Card Act of 2009. Credit card companies are now required to follow specific rules when setting due dates, age limits and notifying you about changes to your original agreement. The credit card companies have responded by making changes to your original agreement (with the required amount of notification.)

With all the new credit card changes that have taken place, I wanted to educate you on some of the fine print. Yes, you should be reading the fine print. Read it before you apply and, and read any additional information that comes to you.  How else will you make informed choices?

Interest Rate – This is the APR, or annual percentage rate. Don't let the name fool you, you'll be charged the interest rate on a monthly basis if you do NOT pay your balance in full by the due date. A single card might have three separate interest rates: one rate for purchases, one for balance transfers, and one for cash advances.

Annual Fee – Some credit card companies charge a yearly "membership" fee. You may be charged the fee even if you don't use the card. Most rewards cards charge an annual fee, but lately other credit card companies having been adding the annual fee to make up for lost income from late payment fees.

Due Date – The last date your payment is required to be at the credit card company. I say "last" because you can make your payment anytime after you receive your bill. You don't have to wait until the last minute.  If you have not paid at least the minimum payment by this date, you will incur a late fee. It's better to pay your credit card within a week of receiving your bill, instead of waiting three weeks for the due date.

Late Fee – The price you pay for NOT making sure your payment is received by credit card company by the due date. This fee is in addition to the interest owed on your balance.

Average Daily Balance Method – This is the most common type of interest rate calculation. You now know your interest rate is called an Annual Percentage Rate (APR), but this is how it is calculated for your monthly bill. They take the balance you owe averaged by the number of billing days in your cycle to come up with the interest amount you owe each month. If you don't pay your credit card in full each month, you will most likely pay interest based on this method.

Two Cycle Billing Method – This is similar to the Average Daily Balance Method, but you are averaging two months worth of balances instead of one. You do NOT want this type of billing method.

Grace Period – This is the amount of time you have to pay your bill in full without having to pay interest. These days are referred to as a grace period because you have not incurred any additional fees and/or interest. Not all credit cards have grace periods. Some credit card companies will allow you to make interest free purchases as long as your purchase is paid off in the same billing cycle.

Minimum Payment – This is the minimum amount you owe to the credit card company each month.  This is typically 2% to 5% of your balance.

Minimum Payment Disclosure – Your bill will tell you how long it will take you to pay off your balance if you make only minimum payments.

Credit Limit – This is the maximum you can charge on your credit card. With the new credit card rules, you cannot go over your credit limit "accidentally." You must give advance notice. Note: if you do give permission, you will be charged an additional fee for going over your credit limit.

Over Limit Fees – This is the penalty fee for exceeding your credit limit. This will be added to your other fees and interest.

Universal Default – Universal default is when your credit card rates increase because you missed a payment. If have more than one credit card, all your cards may increase their rates, even if you only missed the payment on a single card. This is because your credit rating will reflect your new status as a "high risk" borrower, triggering rate increases across the board. Thankfully, with the new credit card rules, your interest rates will not increase immediately. Credit card companies are now required to give you advance notice. This gives you the option of opting out and closing your credit card.

Minimum Age – You must be 21 to apply for a credit card without a co-signer (until recently, you only had to be 18.)  You also must have the means to pay the credit card before you can be approved. These new requirements should make it harder for students with no income to get approved.

Now that you understand the credit card terms and conditions, you can make informed choices. You want to save as much money as possible. If you're looking at a new card (or an old card), never be afraid to call a customer service representative for more information. If you feel you're not being helped properly, call back so you can speak to a different representative. Sometimes saving money takes a little extra effort, but it's worth it.