Considering that credit cards are relatively small pieces of plastic, it is a little surprising how complicated and confusing they really can be. But with a little knowledge, the confusion can disappear, leaving you with a clear mind to pick the best credit card for your specific needs.
Understanding the basics of credit cards and how they operate can help to ease any confusion. Two credit cards that appear to be very similar can, in fact, be completely different once you delve into the specifics of each card's terms and conditions. Watch out for these five things when comparing credit card offers and deciding which one to apply for.
Introductory APR vs. Regular APR
An introductory annual percentage rate (APR) is a temporary, low APR that lasts for a specified amount of time and is attached to a specified type of transaction.
For example, a credit card may offer an introductory 0% APR on purchases for a period of 12 months. This means that all new purchases made with the card for the first 12 months will be attached to a 0% interest rate. There are two things to note in this example:
In the above example, the introductory APR is only attached to purchases, so other transactions made with the card, such as balance transfers or cash advances, will be attached to different APRs (not the 0% APR).
In the above example, the APR on purchases will convert to the ongoing (or regular) APR once the initial 12-month period is over.
The regular (also called ongoing) APR is usually much higher than the introductory APR. A regular APR is a non-introductory interest rate that is applied to balances on a credit card. Regular (or ongoing) APRs are usually listed as either fixed or variable.
It is important to note the differences between introductory APRs and ongoing APRs when deciding which credit card to apply for. Depending on your specific situation, a card with a low introductory rate may or may not suit your needs. If you do opt to apply for a credit card with a low introductory APR, be aware that the APR will jump to a higher rate after the intro period ends.
However, if you plan on carrying a balance on the credit card for long period of time, applying for a credit card with a low regular APR may be a wiser choice, as the APR will usually stay more consistent over time.
Tip: Know when the introductory APR expires and also what the APR will rise to after the intro period is over.
Fixed APR vs. Variable APR
When comparing the various credit card offers available online, you may have stumbled across the terms "Fixed APR" and "Variable APR." If you are unfamiliar with the way credit works, the difference between these two terms can be a little confusing.
In theory, a fixed APR is an annual percentage rate that is fixed, or does not change, while a variable APR is an annual percentage rate that varies, or fluctuates up or down. Fluctuations depend on the current interest rate market or other factors set forth by the credit card issuer. Variable APR's are often tied to the current prime rate, which is a commonly used interest rate used by banks at any given time. For example, a credit card can have an APR of Prime + 5%, which would equal the current prime rate plus 5%. So, if the prime rate goes up or down, so does that card's APR.
Fixed interest credit cards do not necessarily remain the same interest rate forever, as market fluctuations make it is unrealistic to think that a credit card company will settle on one interest rate for their cards and never change.
However, a fixed APR tends to stay more constant than a variable APR. The interest rate on a fixed APR credit card can increase when overall interest rates go higher, but change is not automatic and is usually accompanied by advance notice. Credit card with variable APRs, on the other hand, can change interest rates more often and often without any prior notification.
Tip: A fixed APR is generally more stable than a variable APR.
Balance Transfer Fees
When you transfer debt from one credit card to another, you may be charged a balance transfer fee. This is usually a percentage of the amount you transferred up to a maximum dollar amount. Many people transfer balances from credit card to credit card without realizing that they could be charged an additional fee on the amount borrowed.
This "balance transfer fee" is charged in addition to the "balance transfer rate" that you may be offered. Some credit card balance transfer fees are based on the amount transferred (i.e. 3% of the total amount transferred) while other credit cards have a standing transfer fee for all amounts (i.e. $50 for each transfer).
Some, but not all, credit cards charge balance transfer fees. And those that do charge balance transfer fees sometimes have promotions where this fee is waived for a limited time. You can still find credit cards with no balance transfer fee offers, but be sure to read over any terms and conditions that apply to the offer before transferring a balance.
Tip: Read the terms and conditions to learn about any balance transfer fees that you will incur so as to avoid any surprises.
Universal Default
Universal default is the term used for the practice in which a credit card issuer changes the terms of a credit card from the current terms to the default terms, which are usually less desirable, when that issuer is informed that their customer has defaulted with another issuer lender, or bank. So, despite the fact that the customer has not defaulted with that particular issuer, the terms are changed to the default terms, usually with a higher interest rate, on that account anyway.
In the simplest terms, your interest rate can be raised on Account A, not because you were late or missed a payment on Account A, but because you were late or missed a payment on Account B. Some universal default clauses also allow the bank/issuer/lender to raise your interest rate if that bank/issuer/lender believes that you are a greater risk for one reason or another.
Universal default is not practiced by all credit card issuers, so you can opt to stay away from these types of cards. Be sure to read the terms and conditions of a particular credit card before applying to see if universal default is included.
Tip: Avoid credit cards with universal default clauses if at all possible.
Due Dates
Whatever you do, always make sure to make at least a minimum payment by your due date. A large number of problems with credit cards originate with late or missed payments. Know your due date for each credit card that you own. Each credit card is different, so take the time to figure this out and take measures to remember this each and every month. Set reminders or use a calendar.
Some credit card issuers will even let you set your own due date. So, if you current due date is causing problems for you timing-wise, try giving your credit card company a call and see if the due date can be changed. If a different due date is more convenient for you for any reason at all, it is definitely worth it to ask.
Tip: Know your due date and ask for a change if the need arises.
