Understanding your credit card contract: A 5-step guide to the small print
By Emma Lunn
Credit card contracts are legally binding agreements, but are often so hard to understand that the average cardholder doesn't ever read it.
To help you sort through the fine print, here's a quick guide to the most important numbers, terms and clauses to check before charging.
1. Skim the summary box
In the UK, credit card providers have to provide all the important information about a credit card in form of a "summary box." Originally introduced in 2003, the summary box has been regularly upgraded and should be included in all marketing and pre-contract materials.
So, if you find your card contract baffling, go back to the marketing materials and find the summary box. It will provide an easy-to-read road map of your card's fees, interest rates and penalties.
Where to find it: Go to your issuer's website and find your card. Issuer websites vary, but look for a link to the summary box, or for phrasing like "Learn more."
Locate the APR
The annual percentage rate (APR) will help you get a read on how much the card will cost you.
"One of the first things you need to
understand about any new card is the APR, as that is what will determine how
much the card will cost if you are not going to pay it off in full each month,"
says Gareth Davies, Nationwide's
senior manager for credit cards.
Once you find the APR, divide that number by 12. That's how much interest you will be charged on a given month's unpaid balance.
Where to find it: The APR is usually at the very top of the summary box. If you're looking at your full contract, search for the "Interest" section. The "purchase APR" will be the one that applies to most of your debt -- yet take note of the "cash withdrawal" APR as well.
Know your limit
Your credit limit is the maximum balance you're allowed to have on your card. If you plan on using your card for large purchases, knowing your limit is vital, as you'll be charged a fee for exceeding it. Using up too much of your limit can also hurt your credit.
Where to find it: Because your credit limit is unique to you, it may not be in the generic agreement you receive from your bank. Your bank must provide you with the limit in writing, however, when you are approved for the card. Call your bank (or check your credit card's online account) if you can't find your limit.
Become versed in the introductory offers
If you ignore your credit card paperwork, you could miss out on perks that expire after the first several months of card ownership.
"Look at what introductory offers are available and how long they are applicable," Davies says. "Most credit cards come with 0 per cent introductory deals for balance transfers, purchases or both."
If you made a balance transfer (or are planning to make one), the most important details to look for are the balance transfer period and the interest-free period. The former is the number of days you have to make a balance transfer after opening the card. The latter is how long that balance transfer will be interest free before the card's regular APR is applied to any balance..
Even you didn't make a balance transfer,
you might still have an introductory perk called the "introductory interest
rate." For example, you might have no interest charges for purchases you
make during the first few months of card ownership.
Where to find it: Most of this information will be in the "Interest Rates" section of your card's terms and conditions. Look for both the balance transfer interest rates, as well as the introductory interest rate. The length of the balance transfer period should be nearby as well.
Scout for fees and penalties
Once you're well versed in your card's perks, become equally aware of its penalties.
For example, if you fail to make the minimum payment one month, you may find that you'll lose any introductory interest rate. Additional fees will likely kick in if you pay late or go over your credit limit.
Where to find it: If the information about penalty fees is not in the summary box, scan your card agreement for a section on "Charges."
Finding out how you could lose your introductory interest rate requires a bit more digging into the fine print. First, locate the details about the introductory rate -- then look for footnotes or references that guide you to the section that deals with "Exceptions" or "Interest Rate Changes." This is the section where, if you have extra time, you can learn about all the ways your issuer can change its terms if you fail to play by its rules.
Published: 23 October 2012
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