credit & debt

Does Your Credit Card Measure Up?

Knowing your card’s mechanics can help you avoid high rates and fees.

You probably know that your credit card comes with an interest rate, a limit on how much you can spend and a minimum amount that you must pay each month. But if you’re not familiar with the nuts and bolts of each card component, take a little time to brush up. Knowing the types of activities that trigger a cash advance, for example, could save you a bundle in interest and fees, and smart use of the grace period lets you finance a purchase interest-free for several weeks.

Annual percentage rate (APR). If you don’t pay your statement balance in full by the payment due date, you’ll accrue interest on the unpaid amount (unless your card is charging a 0% APR for an introductory period). Recently, the average rate ran about 17%, according to the Federal Reserve. But many cards come with a range of possible APRs, and the customers with the strongest credit histories capture the lowest rates.

Most credit cards have a variable rate, typically composed of the prime rate plus a “margin” of a set number of percentage points. Each time the Federal Reserve changes the federal funds rate, the prime rate moves in tandem. In the second half of 2019, the Fed cut rates three times, each cut one-fourth of a percentage point. As a result, many cardholders saw their APRs fall by a total of 0.75 point. When a variable APR changes because of an increase or decrease in the underlying index, the new rate applies both to existing balances and new purchases.

By law, card issuers generally can’t bump up your APR the first year you have the card; after that, they have to provide 45 days’ notice before raising it. (Increases resulting from a rising indexed rate or the expiration of a promotional period don’t fall under those rules.) Such hikes affect only new purchases, not existing balances. If a bill payment is 60 days late or more, the issuer can raise the APR on your existing balance with 45 days’ notice. But if you make timely payments for six months following the increase, the issuer must remove the penalty APR.

Grace period. Most cards offer an interest-free window on purchases between the time a billing cycle ends and the payment due date. The grace period must last at least 21 days. If you’re planning to make a large purchase, consider doing so near the beginning of the billing cycle—that gives you nearly two months to pay it off without interest. If you’re carrying a balance from month to month, the grace period disappears, and interest accrues immediately on new purchases.

Minimum payment. The minimum monthly payment is often the greater of 1% of the balance (plus interest and fees) or some flat amount—say, $25 or $35. Paying only the minimum may result in thousands of dollars in interest charges over time.

Credit limit. Your credit history, your income and the amount of credit available to you from other cards typically help determine the cap on your total balance. If you’re new to using a credit card, the maximum may be only about $500 to $1,000 at first, says Kimberly Palmer, of personal-finance website NerdWallet. Over time, your issuer may periodically raise your limit, and eventually the maximum could reach tens of thousands of dollars.

A record of on-time payments and a growing income help boost your limit, so you may want to heed any prompts from your issuer to update your income; the reminders often show up by e-mail or when you log in to your account online. Notably, a card issuer may consider your spouse’s or partner’s income if you’re 21 or older, even if he or she isn’t named on the account and you don’t earn income yourself.

You can also call your issuer and request a credit-limit increase. Even if you don’t want to spend more on your card, a higher limit could boost your credit score if it will decrease your credit-utilization ratio—the amount of credit that you use as a percentage of your card limit.

Balance transfer. Some cards offer an attractive rate (often 0%) for a set period for balances you transfer from other credit cards. However, you may pay a fee of 3% to 5% of the amount you transfer. You can find exceptions: Chase Slate and American Express Every­Day offer 0% interest for the first 15 months and levy no fee if you make the transfer within 60 days of opening the account. You’ll still have to make a monthly minimum payment, and after the introductory period closes, you’ll likely be charged a variable rate in the double digits. Or consider a card with a low fixed rate on transfers. Such cards are most commonly offered through credit unions, says Ted Rossman, of CreditCards.com.

Cash advance. A cash advance, which allows you to withdraw cash against your credit line, should be a last resort. It typically comes with a hefty fee that’s the greater of about $10 or 3% to 5% of the amount withdrawn. And you’ll be slapped with interest immediately, often at a rate that’s much higher than your APR for purchases.

An ATM withdrawal with your credit card is only one way to incur a cash advance. If you use your card as a backup source of funds in case you overdraw your bank account, any overdraft transfer from your card will likely be regarded as a cash advance. If you write a convenience check—which your card issuer may send you in the mail to use much as you would a check tied to a bank account—the withdrawal will be considered a cash advance. If your card permits gambling transactions (many don’t), such as for online gaming, they may be treated as cash advances, says Rossman.

Fees, fees and more fees. Choose and use your credit card carefully and you can dodge fees. Annual fees often come with cards that offer rich rewards in cash back, points or miles. The fees are commonly in the neighborhood of $100, although they can run much higher for premium cards. Some cards waive the fee for the first year of card membership. An annual fee may be worth paying if you reap enough in rewards and benefits. But you can find many generous rewards cards that don’t have an annual fee.

Cards that carry a foreign-transaction fee ding you every time you use your card outside the U.S.—usually about 3% of the transaction amount. The number of cards that charge such fees is on the decline, and most travel-oriented rewards cards don’t have them. Some issuers, including CAPITAL ONE and Discover, omit the fee on all of their cards. If your card does have a foreign-transaction fee, avoid using it on a website based in another country. “You could be at home shopping in your pajamas and end up getting hit with a foreign-transaction fee,” says Matt Schulz, of CompareCards.com.

A credit card’s late-payment fee is limited by federal rules, and the cap is adjusted annually for inflation. In 2020, a card issuer may charge as much as $29 for the first violation and $40 for any subsequent late payments in the following six months. If you miss a payment, ask the issuer to waive the fee—there’s a good chance you’ll succeed if you’ve otherwise been a reliable customer. The Citi Simplicity and PenFed Promise cards charge no late fee, and Discover doesn’t levy the fee for the first late payment on any of its cards.

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