Credit Cards Explained
When signing up for a credit card, there are numerous factors you should consider before making the right decision. But what if you are starting out from the very beginning, and are not even sure what the words you seeing mean? Doing all the right research will not be helpful if you simply don’t understand how to interpret the research, so we have broken down the definitions of some of the major phrases you will see on credit card applications. In short, these are the basics of credit cards explained.
APR – this stands for Annual Percentage Rate. It is most often how credit card interest is described and how you can differentiate rates on cards you are considering. It is stated in terms of a year since it is easy to be comparable, but you must also keep in mind that your credit card interest will be calculated daily based on the interest rate and the amount of money you are carrying as a balance each day.
Some credit cards will offer an introductory APR, or even 0% APR, for a period of time to entice you to sign up for their card. While this can be very helpful to you when starting out using credit cards for the first time, it is also imperative to find out the normal APR after the introductory period has ended – that is, the APR you will be charged for the remainder of you using the card. A credit card with a higher introductory APR but a relatively lower APR after the period has ended will usually always be a better deal than a card that starts with a very low rate and jumps significantly, unless you only plan on using the card for its introductory period. That is a possibility, but keep in mind that you do not want to make a habit of signing up for credit cards and then only using them for a short period of time. Each time you cancel a credit card or sign up for a new one, it can impact your overall credit score. Of course, you can also avoid the issue of APR all together by paying off your card balance in full each month; if this is your plan that is commendable, just keep in mind those times that circumstances might arise in which you cannot pay off the balance as quickly as you would like, and APR will then be a concern. Know what you’re getting into before signing up for a particular credit card, and it will save you a headache in the future.
A credit card annual fee is a set amount that is charged yearly for the privilege of using the card, regardless of how much you spend on it. Some cards do not have an annual fee, whereas some might have quite a high one. The general rule of thumb is the higher the annual fee, the more benefits you can get from the card. For example, a card without a fee might offer you 1% cash back (or less) on all your purchases, while one you pay for might offer you upwards of 2+% cash back. Remember to calculate the value you would receive back from the increased rewards versus the cost of paying for the card yearly itself – if you are not going to put enough purchases on the card to earn back the annual fee and more in rewards, the card will not be worthwhile. If you find yourself not using a credit card all that much, a card without a fee but a lower return might still be your best bet. That way, you are not losing anything if you do not spend the requisite amount to pay off an annual fee. Cash back is not the only thing you can get in return for paying an annual fee, however – many cards offer travel points or other rewards, and most often the same rules apply – the higher the fee, the quicker you are able to benefit. Annual fees can sometimes be waived for the first year of owning a new credit card, but it would still be in your best interest to calculate the amount of money you would be earning versus saving with the annual fee included, since it will be present every year after the first one. Sometimes people will sign up for credit cards with their annual fee waived just to get the benefits of the credit card without having to pay, and then they would have to cancel before the first year is up. This cannot be done too many times, as you risk your credit rating when you are cancelling credit cards, and only keeping them for short periods of time.
A balance transfer fee is another different type of payment that is charged each time you choose to transfer a balance on one credit card to another, to pay it off. The fee is usually calculated as a percentage of the balance you are transferring over to your credit card. In some instances, when you get a new card the company might have a promotional period in which they waive the balance transfer fee or discount it for a certain amount of time in the beginning. This can be good if you are looking to move a balance from one high-interest credit card to one with a lower interest rate, since you would be able to do it with either a small penalty or no penalty at all when you received the new card. After the promotional period is over, the balance transfer fee would be its regular rate, which is often about 2.5-3% of the balance that you are transferring.
When you are first looking at the applications for a credit card, APR, annual fees, and balance transfer fees (and their promotional offers) are going to be the most often touted to differentiate themselves from others – these are what credit card companies use to entice you to choose their card. As long as you understand what those terms are, you are ready to start looking for the card of your choice.