Getting your first credit card can be exciting. But although credit cards are fun, it’s a lot of responsibility. Many people have and will go into debt because of the nature of items credit cards are used to buy. You can practically buy anything with a credit card. Above all, bad debt leads to bad credit. When you receive your credit card, you will get a credit card agreement with it. It contains detailed information about the terms and conditions of your credit card, and as a result, most people tend to ignore it. Therefore, we have singled out at least 5 important things to help you understand your credit card agreement.
1. Minimum Payment
It’s the amount you must pay in order to avoid any penalties. This is most important because payment history accounts for 35% of your credit score calculation. Any missed payments will reflect negatively on you as a lender and potentially damage your scores. To avoid this, set up automatic payments for your credit cards. If you haven’t used your credit card or have a $0 balance, then you won’t have a minimum payment.
2. Credit Limit
This is the maximum amount you can borrow with your card. For example, if you have a $2,000 credit limit, you can borrow up to $2,000. Some credit cards will allow you to go over your limit, but beware, you will be paying heavily in fees. Always be aware of your limit, and most importantly, try to spend only what you can pay back.
3. Annual Percentage Rate (APR)
Your card’s APR is the total cost of borrowing with your card. For instance, if your APR is 20% and you borrowed 10,000, you will pay about $2,000 for that year. There is fixed and variable APR, and most credit cards have a variable APR. This simply means it doesn’t stay the same, it can change. Your credit card may also come with different APRs, so depending on how you use the card, you might be charged differently. The lower your card’s APR, the better. But in order to get a lower interest, you must have very good to excellent credit.
Annual fees, late payment fees, foreign transaction fees, or other costs that come with your card. It’s important to know all of these so there will be no surprises on your credit card statement bill. The best travel credit cards will usually have an annual fees, like the Chase Sapphire Preferred. Frequent travelers to overseas destinations want to look for a card with NO foreign transaction fees. Some credit cards will allow for cash advances. Fees associated with these types of transactions are usually very high. Subsequently, cash advances don’t have a grace period, which means your interest starts to accrue immediately. Other credit card fees include returned payment fees, overlimit fees, and balance transfer fees.
5. Grace Period
The amount of time you have between your credit card’s closing date of the billing cycle and the due date for your minimum payment. Most grace periods are usually around 21 days, and give you time to pay your balances and avoid interest.