Learn how credit cards work: The fine print

Credit cards can be a useful part of your financial toolbox. Along with enabling you to purchase items now and pay for them later, credit cards can also help you build your credit score. But don’t start filling out that application until you have a good understanding of how credit cards work. It’s easy to sign on the dotted line, but it isn’t as easy to understand the fine print that weaves its way into credit card contracts. Before signing up, here’s what to keep in mind about hidden (and potentially deceptive) credit card terms and conditions.

Finance charges

There are often fees to be aware of, including:

  • Late fees. For the most part, you will avoid charges if you pay the full amount of the entire balance you owe each month within 25 days of your statement closing date, says Julie Bruning, Vice President of Consumer Lending at Cobalt Credit Union. However, finance charges do vary between cards. Most financial institutions, including Cobalt, will charge a late fee if you fail to pay at least the minimum payment on time.
  • Overage fees. Other institutions (Cobalt not included) will charge you a fee if you go over your credit card limit. If you have an especially low credit limit (particularly those of you just starting to build your credit), this type of fee can be onerous because it can put you in a situation where you’re doing nothing but paying off these fees, as well as the interest on those fees.
  • Annual fees. In addition, credit cards often come with annual fees, particularly those that offer airline miles or other reward options.
  • Balance transfer fees. Credit cards often give you the option to transfer balances from other credit cards. In most cases, however, you will have to pay a balance transfer fee that’s between 1% and 3% for the amount you’re transferring. This fee is in addition to the balance transfer rate. Once you transfer the debt, it will be subject to the balance transfer interest rate specified in the terms of the new credit card.

Bruning adds that Cobalt does not charge annual fees or balance transfer fees on any of the credit cards it offers.

Interest rates

Interest rates for credit cards can be mystifying. Some financial institutions offer fixed rates, while others like Cobalt offer variable ones. A single institution may even offer different rates among the cards they offer, depending on whether the card is associated with a rewards program or how much money you hold in a savings account.

According to Bruning, variable rates (which in Cobalt’s case are determined by The Wall Street Journal prime rates) tend to be more reliable because they generally stay in line with the market, which means you can track and anticipate rate changes fairly easily. In contrast, an institution offering a fixed rate can change the rates without warning.

“For instance I had a credit card that had a 9% rate that was fixed and I received a letter in the mail that stated that due to the current trends my rate was increasing to 15% fixed!” Bruning says.

Finally, many credit card providers will try to entice you by offering a low introductory APR (annual percentage rate). This offer often comes hand-in-hand with the ability to transfer balances from another credit card or other expense. Keep in mind the length of that introductory rate, which usually lasts between six months and a year.

Says Bruning: “After the introductory period, the rate will revert to your regular standard rate, which can be much higher.”

Read those terms!

Reading the fine print of credit card terms might not be your idea of a good time, but it’s important to look through that info. When you’re aware of the fees and rates associated with your card, you’ll be empowered to make better financial decisions.

Can you think of some other things to keep in mind about how credit cards work? Please share in the comments!

Need help figuring out or improving your credit situation? Download the free Credit Repair Action Plan worksheet.