How Credit Cards Work

Taking the time to find the best credit card rates and reading the fine print of credit card terms might save you from falling into the black hole of debt.

How do I get the best credit card deal?

Make sure you know all the details of how your credit card will work. Study terms and costs closely before signing up. Try to avoid credit cards that charge annual fees in exchange for rewards or perks and services. Generally, these perks work to your disadvantage. Reward credit cards work best for those folks who are able to pay off purchases before interest is charged. The people who get the best credit card deals are those who have the best credit to begin with. If you don’t already know your credit score, find out.

Credit Card APR’s

The lower the interest rate, the less money you’ll pay when you carry a balance. Some cards come with a super-low introductory rate. Pay close attention to the interest charged when the teaser rate ends. About 70 percent of all credit cards come with variable rates. Most issuers use The Wall Street Journal prime rate as an index. The interest rate on variable rate credit cards fluctuate with an index and can increase substantially within a year. In recent years, interest rates have rarely decreased.

The interest rate on a fixed-rate card does not normally fluctuate each month or each quarter. If you sign on for a card with a fixed 12.99 percent rate, there’s a good chance you’ll be paying 12.99 percent for quite awhile unless all user rates are increased or your credit score decreases. The Credit Card Accountability Responsibility and Disclosure Act of 2009 requires that credit card issuers give consumers at least 45 days’ advance notice of significant changes in their credit card terms. Users can also opt out of the changes to their old accounts although doing so prevents users from using the card again.

The Credit Card Act of 2009 also prevents credit card issuers from increasing interest rates on existing account balances — except in a limited number of circumstances.

Credit Card Grace Periods

Most cards offer grace periods to customers who pay off their balances each month. A grace period is the period from the statement date to the payment-due date. If payment is made in full by the end of the grace period, no interest is charged. Interest-free grace periods on most cards have been lowered to 20 days from 25 days a few years ago.

Credit Card Penalties

Most cards charge a fee for balance transfers. The fees range from 3 to 5 percent of the balance being transferred.

Some card issuers have charged as much as $35 in late fees. The Credit Card Accountability Responsibility and Disclosure Act of 2009 and final rules adopted by the Federal Reserve Board in June 2010 made changes that benefit users. The changes:

Prohibit credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account’s terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of credit card violations.

Prohibit credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer’s violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.

Bans “inactivity” fees, such as fees based on the consumer’s failure to use the account to make new purchases.

Prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.

Requires issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the interest rate.

Establishing Credit

There are banks that specialize in extending Visa and MasterCard credit cards to those starting a credit history. Initially, apply only for only one credit card. This is because credit applications show up on your credit report and several applications in a short period look bad, especially if multiple rejections occur. If rejected, apply for department store credit cards or oil company credit cards and build a credit history using those cards. These cards are easier to obtain than the Discover Card, American Express, MasterCard and Visa cards.

A second approach to build credit is to get a secured credit card. With a secured card, you place a deposit with the credit card company and they provide you with a credit card. The credit limit is typically equal to the deposit. Sometimes, a bank will reward you for a good payment history and add to your credit line without requesting additional deposits. Secured credit cards may also be the answer for people who are re-establishing credit worthiness. Responsible use of a credit card also builds a good credit rating, making the card owner more worthy in seeking an auto loan or home mortgage.

Carrying a small balance on a department store card or secured card isn’t bad because it shows that you can handle an outstanding balance.