I’m not opposed to credit cards – but I do believe that the only way to use credit is to use it responsibly. And one of the best ways to ensure responsible credit card use (in addition to paying your balance – in full! – every month) is to know how your card works.
How much do you really know about your credit card? Sure, you probably know your credit limit. If you have a balance, you probably know that, too. But do you know how a late payment will affect your APR? Do you know if your card company charges you an “international transaction fee” if you buy something from another country? Have you ever taken a closer look at how much you actually have to spend to earn rewards points or airline miles?
If you’ve ever tried to read through the “terms and conditions” document that comes with a typical credit card, you know that it’s not exactly fun reading. The text is tiny, and the language is complicated. My suggestion? Rather than trying to wade through the terms and conditions on your own, visit your card company’s website (most have a reader-friendly FAQ section, and many offer online chats with real company representatives) or call their customer service number and ask a few questions.
Here are the most important things to ask about your card’s terms and conditions:
1. How does your credit card company handle a late payment? Nobody ever intends to pay their credit card bill late. But people aren’t perfect, and everybody makes mistakes. That’s why it’s important to understand exactly what will happen if you pay your credit card late. First of all, you should ask your card issuer how they define “late.”
Some companies offer a “grace period” of anywhere from 24 hours to a few days – as long as you pay before that period ends, nothing will happen. Other companies, though, consider a payment “late” at midnight on the day your payment is due – and they’ll slap you with a hefty late fee on top of whatever amount you already owe. Depending on how late you are with your payment, they may even report your delinquency one or all of the credit reporting bureaus, which can wreck your credit score. You should also ask how a late payment might affect your APR. A late payment could lead to a noticeable increase.
2. How do rewards work? Many credit card companies try to win you over by advertising appealing extras like rewards points or airline miles earned for every dollar you spend with your card. But when you look a little closer, some of these “rewards” aren’t so rewarding after all. Many airline mile reward programs have blackout dates that only allow you to travel during off-peak times. What’s more, your airline miles may expire if you don’t use them by a certain date.
If your credit card offers rewards points or cash back on certain purchases, it’s a good idea to ask about any exclusions. For example, some rewards cards only offer rewards when you shop at certain stores. Say you always shop for groceries at Store X, but your card issuer only gives you points at Store Y. Store Y is across town and it doesn’t stock many of the things you like. The result? You might get much out of the program.
A few other questions to ask: Are there yearly or monthly fees for participating in the rewards program? How much do you have to spend to earn miles or points? What other restrictions or exclusions apply?
3. What’s the policy on international transactions? What is considered an international transaction? Typically, when using a credit card abroad, you can opt to have your transaction processed in local currency or in American dollars. Either way, you’re probably looking at some kind of fee – either a conversion fee or a “foreign transaction” fee. And no matter which option you choose, you might end up paying a fee of somewhere between three to five percent. That said, there’s been a gradual trend of dropping these types of fees, so there’s a chance that your card might not even charge one.
Not planning any overseas travel any time soon? You still might want to ask about this, since some credit card companies also charge international transaction fees if you shop at an online store based in another country.
4. Ask about – and opt out of — over-limit fees. An over-limit fee is basically a way for the credit card company to make sure that your card is never declined – even when a purchase would technically put you over your credit limit. Instead, the transaction is approved, and you are charged a fee for going over your limit.
You can probably guess how I feel about this one. First of all, if you really are using your card responsibly, your credit limit should never be an issue. Your card should be paid off in full at the end of every month. If it’s not, you shouldn’t be using it. End of story. But just to be on the safe side, you should make sure that you opt out of whatever over-limit program your card issuer offers. Better safe than sorry.
5. What sorts of fees do you charge for balance transfers? If used responsibly (and not over-used or abused), a balance transfer can be a helpful way to escape a super-high interest rate – which can, in turn, help you pay off a large balance a little bit faster. Many credit card companies advertise tempting balance transfer offers like low introductory rates or reduced fees. But before you sign up, you should do a little more research: Find out how long that special introductory rate lasts. In some cases, if you don’t pay off your entire balance transfer in a few months, your APR goes way up, leaving you right back where you started. Most companies charge some sort of fee for balance transfers (usually a percent of the total transferred), and depending on how much you’re transferring, you could be looking at a hefty chunk of change.
By taking the time to learn a little more about your credit card company’s terms and conditions, you’ll be in a better position to use your card responsibly – and to avoid unexpected fees and penalties.