You probably know that your credit card has an interest rate, a limit on how much you can spend, and a minimum amount you have to pay each month. But if you’re unfamiliar with the nuts and bolts for every component on the board, take some time to refresh yourself. Knowing the types of activities that trigger a cash advance, for example, could save you a lot of interest and fees, and smart use of the grace period allows you to fund an interest-free purchase for several weeks.
Annual percentage rate (APR). If you don’t pay your statement balance in full by the payment due date, you’ll earn interest on the overdue amount (unless your card charges 0% APR for an introductory period). Recently, the average rate was around 17%, according to the Federal Reserve. But many cards come with a range of possible APRs, and customers with the strongest credit histories see the lowest rates.
Most credit cards have a variable rate, usually made up of the prime rate plus a “spread” of a number of percentage points. Every 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 by a quarter of a percentage point. As a result, many cardholders have seen their APRs drop by 0.75 points in total. When a variable APR changes due to an increase or decrease in the underlying index, the new rate applies to both existing balances and new purchases.
By law, card issuers generally cannot increase your APR the first year you have the card; after that they have to give 45 days notice before lifting it. (Increases resulting from an increasing index rate or the expiration of a promotional period do not fall under these rules.) Such increases only affect new purchases, not existing balances. If a bill payment is 60 days or more late, the issuer can increase the APR on your existing balance with 45 days notice. But if you make payments on time for six months after the increase, the issuer should remove the APR penalty.
Grace period. Most cards provide an interest-free window on purchases between the end of a billing cycle and the payment due date. The grace period must be at least 21 days. If you’re planning on making a large purchase, consider making it near the start of the billing cycle, which gives you almost two months to pay it off without interest. If you keep a month-to-month balance, 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 a fixed amount, say $ 25 or $ 35. Paying only the minimum can result in thousands of dollars in interest charges over time.
Credit limit. Your credit history, income, and the amount of credit you have available from other cards usually help determine your total balance limit. If you’re new to using a credit card, the maximum may be only around $ 500 to $ 1,000 at first, says Kimberly Palmer, of the NerdWallet personal finance website. Over time, your issuer may periodically increase your limit, and eventually the maximum could reach tens of thousands of dollars.
A one-time payment history and growing income help increase your limit, so you may want to heed your issuer’s prompts to update your income; reminders are often displayed by email or when you sign in to your online account. Notably, a card issuer may consider the income of your spouse or partner if you are 21 or older, even if it is not named on the account and you are not earning 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 increase your credit score if it lowers your credit utilization ratio, which is the amount of credit you use as a percentage of. the limit of your card.
Balance transfer. Some cards offer an attractive rate (often 0%) for a specified period for balances you transfer from other credit cards. However, you can pay a fee of 3% to 5% of the amount you transfer. You may find exceptions: Chase Slate and American Express EveryDay offer 0% interest for the first 15 months and charge no fees if you make the transfer within 60 days of opening the account. You’ll still need to make a minimum monthly payment, and after the introductory period ends, you’ll likely need to pay a double-digit variable rate. Or consider a card with a low fixed rate on transfers. These cards are most often offered by credit unions, says Ted Rossman of Credit Cards.com.
Cash advance. A cash advance, which allows you to withdraw money from your line of credit, should be a last resort. It usually comes with a high fee which is the greater of around $ 10 or 3% to 5% of the amount withdrawn. And you’ll be immediately slapped with interest, often at a rate much higher than your APR for purchases.
Withdrawing from an ATM with your credit card is just one way to get a cash advance. If you use your card as a source of back-up funds in case you overdraft your bank account, any overdraft from your card will likely be considered a cash advance. If you write a convenience check, which your card issuer can mail to you to use as you would a check linked to a bank account, the withdrawal will be considered a cash advance. If your card allows gaming transactions (many don’t), like online gaming, they can be treated as cash advances, Rossman explains.
Fees, fees and more fees. Choose and use your credit card carefully and you can avoid the charges. Annual fees often come with cards that offer rich rewards in cash, points, or miles. The fees are usually in the range of $ 100, although they can be much higher for premium cards. Some cards waive fees for the first year of card membership. An annual fee may be worth paying if you reap enough rewards and benefits. But you can find many generous rewards cards that don’t have an annual fee.
Cards that have an overseas transaction fee earn you money every time you use your card outside of the United States, typically around 3% of the transaction amount. The number of cards that charge such fees is dropping, and most travel-focused rewards cards don’t. Some issuers, including CAPITAL ONE and Discover, omit the fees on all of their cards. If your card has an overseas transaction fee, avoid using it on a website based in another country. “You could be at home shopping in your pajamas and end up with overseas transaction fees,” says Matt Schulz, of CompareCards.com.
Late payment fees for a credit card are limited by federal rules and the limit is adjusted annually for inflation. In 2020, a card issuer can charge up to $ 29 for the first violation and $ 40 for any later late payments over the next six months. If you miss a payment, ask the issuer to waive the charge – there’s a good chance you’ve been successful if you’ve been a reliable customer otherwise. Citi Simplicity and PenFed Promise cards do not charge any late fees, and Discover does not charge a fee for the first late payment on any of its cards.