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I’ve got a sweet guest post for you this week from Tom at FIRED UP Millennial. Tom “FIRE” runs his own personal finance blog centered around achieving Financial Independence and Retiring Early – hence the FIRE. You can follow his journey at his blog at FIREdUpMillennial.com and on Twitter @FIREdUpMillenn. He’s a pretty awesome guy and has great tips for managing the fine print of credit cards. Enjoy! ~ Jamie
We’ve all been there before. You open up your mailbox and – great news (!!!) – you’ve been approved for an awesome new credit card with great rewards and a low interest rate.
Awesome! Let’s sign up!
Not so fast there…
When you receive a pre-approved credit card offer in the mail, there are often many risks and hidden fees lurking in the contract. While credit cards obviously have their benefits, frequently cardholders get into trouble because they don’t understand the nuances outlined in the fine print.
In fact, the majority of cardholders don’t even read the fine print to begin with. This often causes them to accumulate debt – which we all know can be quite difficult to get out of.
Don’t be one of these people.
In 2017, roughly 38 percent of people in America carried credit card debt, with an average debt load of $5,700. Considering that, it’s worth getting to know the details of a credit card contract. By properly understanding the contract, you can have a better understanding of how to avoid credit card fees and reduce interest rates you’ve accumulated on a monthly basis.
What’s Hidden in the Fine Print?
Most people with a credit card are familiar with the multi-page document that comes in the mail with the card. But how many cardholders have taken the time to comb through these tiny details?
I’d bet only around 5 percent or less.
If you are one of the many credit card holders who haven’t browsed through the fine print, you are very likely missing vital information about the penalties, charges, and interest rates already affecting your monthly bill.
10 Standard Credit Card Fees to Watch Out For
Introductory Annual Percentage Rate (APR):
You might have applied to a credit card for the promise of low interest, but is this interest rate just an introductory offer? If so, how long does it last, and what is the average interest rate after that?
Some credit cards will offer an extremely low APR for six to 12 months, followed by a much higher one. Don’t fall for the this common, sneaky trick that so many credit card companies use
APR on Non-Standard Transactions:
A standard transaction is using your credit card to make a purchase for a product or service. But what happens on other less conventional transactions like balance transfers and cash advances?
It’s common for credit card companies to apply a different (and usually higher) APR to these unusual financial transactions. How do I avoid these fees? Simple. I don’t use my card for balance transfers or cash advances unless I fully know and understand the repercussions.
Finance charges are applicable when the balance is not paid off in full every month. It is essentially just another way to describe interest accrued. There isn’t much more to it than that.
I personally pay my balance off in full each month to avoid any interest charges and I recommend that every does the same. If you can’t afford to pay it off within the next month, don’t buy it.
Financial Calculation Method:
How does your credit card calculate the interest owed? How does it calculate when you don’t pay off the balance in full every month? How is it calculated on balance transfers, or on cash advances?
Often, the financial calculation method is a complex one, but crucial to understanding your monthly bill. A good first step is to just understand how interest works, in general.
Although many of us assume that we have a full month to pay off our credit card bill before interest rates apply, that’s rarely (if ever) the case. Most cards have either a 21- or 25-day grace period.
Don’t wait until the grace period is over to make a payment. Pay off your balance in full before the grace period is over and you’ll be a-okay.
You might have signed up for your credit card because it came with a lot of perks. For example, maybe it has a relatively low interest rate. It might also have a valuable rewards program. Keep in mind that credit cards with added perks may also have an added annual fee, sometimes hundreds of dollars.
Don’t just sign up for the card that offers the highest rewards rate. Take a look at the annual fee and decide whether it is worth it or not. That $199 per year card with a 5 percent rewards rate at restaurants won’t do you much good if you only earn $50 in rewards over the year.
Foreign Transaction Fees:
If you travel internationally, pay close attention to the foreign transaction fees. Most credit cards charge between 2 to 3 percent on all purchases made in a foreign currency. When traveling, these costs can quickly add up. There are several cards that have no foreign transaction fee. If you want to use your card abroad, check some out.
Late Payment Fees:
Most credit card contracts contain a late payment fee, capped at $25 under federal regulation. Even if you miss a payment, but you later pay off the full amount, the charge is still applicable.
If you cannot pay off your credit card in full every month, always pay the minimum monthly charge – at the very least – to avoid this fee. If you can’t afford your card balance, the last thing you need is extra fees added on top of the interest that is about to accumulate.
Taking a cash advance from your credit card is a dangerous game because most credit cards charge an administration fee for each cash advance, plus significantly higher interest rates for the amount withdrawn.
Weigh the costs against the rewards before taking out any cash advance. More than likely, the costs aren’t worth it. You’re better off whipping out that debit card and using it instead.
While some credit cards advertise zero percent interest on balance transfers, there may be hidden fees for these transfers they don’t talk about. For example, although you might not have to pay interest on the balance moved from one card to another, you might have to pay a one-time balance transfer fee. This can add additional debt burden to your transaction, even if you thought it was saving you interest charges in the future. Make sure to read the fine print before transferring any balances.
Smart Credit Card Spending
With a better understanding of how and when additional fees apply, it’s hopefully much easier to avoid them in the future. If you want to use your credit card with the least risk of additional fees, there are a few guidelines to keep in mind:
Pay off the balance in full every month:
It’s one of the most commonly ignored pieces of advice, but the most important. Paying off your credit card not only stops the accumulation of interest, but you can avoid accruing interest entirely if you pay it off within the grace period.
Like I said before, my philosophy is if you can’t afford to pay for it all, don’t buy it in the first place.
Never miss a payment:
If you cannot pay off your monthly balance in full, always meet the minimum payment schedule. This helps you maintain a good credit rating and avoid late payment penalties.Avoid cash advances: Cash advances on credit cards come with high interest rates and hidden fees. Unless it’s an emergency, you should always avoid getting cash from a credit card; just use your debit card instead.
Be wary of store credit cards:
If you haven’t already, you’re likely to eventually find yourself standing at the register ready to pay for those new clothes when the cashier asks if you’d like to receive $100 off your purchase simply by signing up for their store credit card.
While it may be enticing, these cards often charge the maximum allowed interest rate and high fees. Don’t sign up for a store card just because you can save right then and there. Wait until you have time to do your research and read the fine print before making your wallet or purse a little heavier.
Use rewards wisely:
Just because you can get double the rewards for buying five bottles of ketchup doesn’t mean you should. People can often get carried away with accumulating rewards and spend far beyond their means.
Choose a card with rewards that make sense to your lifestyle and avoid making unnecessary purchases just to accumulate points. Don’t sign up for that awesome new credit card that offers 10 percent back on dog food if you only have cats. Figure out which cards would give you the most rewards on what you already buy.
Credit: LucasFilm Ltd. via imgur
Putting It All Together
Reading about all of the fees and details hidden in the fine print of credit card applications can seem like a daunting task. There are lots of things to look out for and to consider, however, most of them will never come into play if you know how to use your card smartly.
Pay off your balance in full each month, don’t take out cash advances, avoid using your card overseas (unless you know the repercussions), and only transfer your balance if you know how much it’ll cost you.
Credit card debt is no joke…trust me.
It can be very difficult to pay off when so much interest (often above 20 percent) accumulates each month on top of what you already owe.
If you are smart about your credit card usage and read the fine print, you can make credit cards work for you in terms of building credit and earning rewards.
Let Me Know in the Comments
How do you avoid credit card fees? Have you ever gotten confused by the fine print?
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