Alright, so I have to admit something.
I have no idea what the terms of my credit card are.
Just now I had to check my online statement to find what my credit line is, my APR, how interest is calculated, or what fees I may owe if I don’t pay off my card. First, I probably should know all the basics of what a credit card entails, which means defining the terms above so that they make sense to me.
Credit line: The amount of money I’m allowed to charge to my credit card. Another way of putting this is the amount of money I can borrow from the bank. My number is $5,000. The credit line is calculated based mostly on your credit score, but there are also a lot of different options for credit lines as discussed in this article.
APR: Annual Percentage Rate. This is the amount of interest that you pay annually on your account. Right now my annual percentage rate for purchases, balance transfers, direct deposit and check cash advances, and bank cash advances are below:
13.24% is a A LOT to spend on interest for purchases alone. My credit card offers a grace period for new purchases, meaning that if I buy something and pay off the balance by my due date I am charged zero dollars. This saves me a ton of money & makes having a credit card worth it to me. Now, the bank doesn’t wait until the end of the year to charge interest even though they say “annual” percentage rate. Instead they use a formula to determine the daily periodic rate (APR/365 days of the year) to charge interest on my purchases for the days remaining in your billing period. For my credit card specifically, my due date is at least 25 days after the close of each billing cycle. So if I pay off your credit card the next month I’ll only be charged the amount of days past the days I had an outstanding balance on my card.
Here’s the kicker though, there is another hidden interest rate on late purchases called the Penalty APR. According to my bank, this APR is up to 29.99% based on my creditworthiness, and can be applied to new transactions on my account if I make a late payment. Making a late payment can really screw me with interest rates, which is why I always pay off my credit card.
The other percentage rates are specific for each transaction above. For example, if I needed to put money into your checking account to keep from overdrawing and used my credit card to do so, I would be charged 16.99% if I didn’t pay that money back within the billing period. That’s a lot of money!
Annual fee: Banks may also charge a yearly fee for a credit card. In my case, my annual fee is $75. Is it worth it to have my credit card for $75 a year? Aside from the benefits of earning 1 mile for every $1 I spend, and a reduced rate on companion fares (one day this will be of benefit to me, I’m sure), having a credit card and paying it off every month allows me to build credit without taking out any loans, buying a home, or leasing a car. Interestingly, the Platinum and Preferred accounts have a lower annual fee, but have an increased APR for purchases. It might be worthwhile to me to talk to my bank about qualifying for those accounts and switching cards.
Penalty fee: This is yet one more way credit card companies suck the life out of you and force you to be indebted to them even more. The penalty fee is for late or returned payments, and is a one time fee per transaction. So if you have multiple late payments, you’ll get dinged every single time. For me my late payment fee is $35 and my returned payment fee is $25.
Also, if any of you are interested the graph below breaks down the categories I spend my credit card on:
Basically I charge whatever I can to my credit card (miles, baby!) and then pay it off as I go. I have all of my same accounts through the same bank, so I can easily transfer money from my checking account to my credit card and don’t have to worry about receiving my statements in the mail since I can track every single purchase online.