How to Understand Credit Cards

To understand credit cards and how to use them wisely, individuals may wish to take a personal finance course. It is important to read through the "terms and conditions" forms that are provided at the time of applying for the line of credit and familiarize yourself with a card's APR, grace period and limits. Individuals who are planning to apply for credit cards should understand all of these details and compare various credit cards.

Difficulty: Moderate

Instructions

1. Understand that the credit card's APR or annual percentage rate is a way of expressing interest rate accrual when a balance is carried on the statement from month to month or charged due to some transaction (such as a cash advance).

2. Determine the type of APR associated with the credit card by reading through the terms of the card. The credit card may have one APR for credit card purchases and another for cash advances or balance transfers. Also note if the APR is fixed or variable, with variable rates changing over a period of time.

3. Learn the grace period of the credit card, which is the number of days given to the buyer to pay the balance in full without being assessed finance charges. For example, the lender may give a credit card user 25 days from the statement date, given on the credit card bill, to pay the entire balance off to avoid finance charges.

4. Calculate the finance charge by knowing the method the lender uses, such as calculating the finance charge over one or two billing cycles, the average daily balance or adjusted balance. For example, to calculate using an average daily balance, the lender will calculate the finance charges based on the average balance you carried throughout the month per day.

5. Realize that some credit card companies charge a minimum finance fee. For example, the card may charge a minimum finance charge of $2 even if your calculated charge is just $1.

6. Be educated about the credit card's fees, if any, including annual fees (paid once per year), cash advance fees, late payment fees, over-the-limit fees, set up fees, and any other fees. Fee amounts and applicable charges will be detailed in the terms and conditions of the credit card.

7. Investigate any introductory offers prior to accepting them by reading the terms of the agreement. Most introductory periods offer discounts such as low or no interest rates for a limited time, but they may back-charge those rates for any balance that is carried past the intro period. Also, learn of any fees associated with the account for using these features.