Credit Card Terms and Fees

Annual Percentage Rates -- The purchases APR:  The interest rate applied to purchases made with the card;  the introductory APR:  The introductory APR or teaser rate is applicable to purchases for a specified number of months or billing cycles; but sometimes is applied to balance transfers, too.  This rate is almost never applied to cash advances.  The balance transfer APR:  The interest rate applied to balances transferred to the card.  [Not all cards offer balance transfers.]  Sometimes this APR is the same as the purchases APR; other times it is higher than the purchases APR, but lower than the Cash Advance APR.  There also may be fees associated with transferring a balance.  A popular promotion of credit card issuers is to offer "no balance transfer fees" and to apply the introductory rate to balance transfers, too.  The cash advance APR:  The interest rate applied to cash advances.  This rate is almost always higher than the purchases and balance transfer interest rates and has no grace period.  This means that the interest starts accumulating the day you take the cash advance.  There are also fees associated with taking a cash advance than run from 1% to 3%. 

Annual Percentage Rates are of two types:

Fixed APR:  As the name suggests, a fixed annual percentage rate means that the finance charge does not vary since it is not linked to the performance of an economic indicator.  Do not take the term fixed to mean that the card issuer will never raise the rate and you will be paying the same interest rate on your card balance five years from now.    Card issuers always reserve the right to raise (or lower) a fixed APR in the terms and conditions section of credit card agreements.  Federal law requires that a credit card issuer give you written notice 15 days before increasing a fixed APR.   A fixed APR is advantageous when the prime lending rate is increased.  With an increased prime rate, credit card holders with a variable APR will have an increased finance charge, while card holders with fixed APRs will not, so long as the card issuer does not exercise its option to increase the fixed rate.

Variable APR:   With a variable APR, the interest rate being charged on your account balance changes as the economic indicator, or indices, used to determine the variable rate changes.   Because the rate change is linked to the performance of the index (such as the prime rate), which may rise or fall, these plans are commonly called "variable rate" plans. Rate changes raise or lower the amount of the finance charge you pay on your account. If the credit card you are considering has a variable rate feature, the card issuer must tell you that the rate may vary and how the rate is determined, including which index is used and what additional amount (the "margin") is added to the index to determine your new rate.  The most commonly used index is the prime lending rate or prime rate.  For example, upon examining the terms and conditions of a credit card agreement you might read the interest rate defined as prime rate + 4.99%.  This means the variable APR is determined by adding the prime rate to a margin of  4.99%.  If the current prime rate is 9.5%, one would calculate the variable APR by adding 9.5% and 4.99% to arrive at a variable APR of 14.49%.
Other factors:  Other credit card features affect interest rate.  The grace period is the period of time between the date of a purchase and the date interest starts accumulating on the purchase.  Typical grace periods are 20 to 25 days.  If a card has no grace period, that means interest starts accumulating from the date of purchase. 

Cardholders can avoid interest charges altogether by paying their balances in full within the grace period.  Cash advances have a zero grace period, meaning you are charged interest from the day you receive the cash advance. 
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If a credit card comes with an annual fee, this means that the effective interest rate on the credit card is actually higher than it appears, but only if you maintain a balance.  How much additional  interest?  To calculate this, estimate the monthly average balance carried on the card; divide the annual fee by this amount to arrive at your effective APR.  For example, if you have a credit card with a 14% APR, a $30 annual fee, and maintain an average balance of $800 on your card, this means the effective APR on the card is actually 3.75% plus 14% which equals 17.75%. 

Fees, such as cash advance fees, balance transfer fees, over the limit fees, and late payment fees are hidden charges often associated with credit cards.  You can avoid them for the most part by paying your bills on time, not exceeding your credit limit and avoiding cash advances.

Next Topic:  How Interest Rates are Determined