Understanding Your Credit Card Contract


The terms that credit-card companies use can be confusing—some consumer advocates argue they are purposefully so. Here's a rundown of some of the most important.

• APR is the annual interest rate that credit-card companies charge. It determines how much interest a customer will pay on their purchases. There are two types of interest rates, variable and fixed. A fixed rate is not based on a market index and can change at any time. Credit-card companies must give consumers 15 days notice. A variable rate means that the APR is generally based on the prime rate, which is an interest rate determined by the U.S. government. Some credit-card companies that use this prime rate add percentage points to the government rate.

• Credit limit is the most a cardholder can charge on their card. Often in credit-card advertisements, and preapproval offers, credit-card companies quote high credit limits, to the tune of $12,000. But before you start charging, check to see what credit limit you actually received. Also, your credit score is affected by the ratio of your card balance to your credit limit, so when you near your credit limit, your credit score can decrease. Try to keep your charges at 30% of your total credit limit.

• Annual fee is the amount a credit-card charges consumers for using the card. It is often a simple fixed number, and ranges in amount. Before applying for a card, look to see if there is an annual fee.

• Transaction fees are fees charged for anything other than simple purchases, including balance transfers or cash advances.

• Grace period is a period during which charges don't accrue interest. Some credit-card companies charge interest from the moment something is purchased. Check with your card company to see if they offer grace periods, and for how long.

• The Schumer box is a chart required by law that contains some crucial information including APR, length of grace period, annual fee, minimum finance charges, any transaction fees, late payment fees, over-the-limit fees, and a formula for how the APR is calculated if APR is variable. It's nicknamed for Senator Charles Schumer (D-N.Y.), who pushed for the box's creation.