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Credit card fine print: How to read it

With some work, you can understand credit card offers

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Credit card offers are well known for having fine print that outlines terms and conditions in language that can be difficult for the average consumer to understand.  Experts say that you need to wade through it anyway. When you sign the application, you have committed to abide by its terms -- whether you understand them or not.

Compare Low Interest Credit CardsTo some degree, the legalese is required by law. But in recent years, the card industry has inserted terms and conditions in its favor.

Although consumer advocates consider some of the clauses sneaky and unfair, they are perfectly legal as long as the card issuer discloses their rights and intents.  Comparison-shopping -- and knowing what to look at -- can help you decide whether a card is right for you. 

For starters, look at the offer's Schumer box, an easy-to-read table that summarizes fees, rates and penalties.  The Schumer Box was born in due to legislation amending the federal Truth in Lending Act that requires credit card issuers to include the costs of credit cards in all solicitations and applications and to display them in an easy-to-read format.  The Schumer Box format is named for Rep. Charles Schumer (now New York's senior U.S. senator) who spearheaded the legislation in Congress in 1988. It finally took effect in 2000.

The Schumer Box includes:

  • Annual fee (if applicable)
  • Annual percentage rate (APR) for purchases
  • Other APRs (for balance transfers, cash advances, default APRs)
  • Grace periods for purchases
  • Finance calculation method
  • Other transaction fees (for cash advances, credit card balance transfers, late payments, and exceeding the credit limit)

Thanks to the standard format provided by the Schumer box, comparison shopping for credit cards is easier than ever.  Everything in the Schumer box is need-to-know information for every credit card user.

But there are many more items not included in the box that are also helpful for the cardholder. By law these items appear in the terms and conditions of your credit card. Knowing them can help you avoid getting into trouble.

Some phrases to look out for in the terms and conditions of the contract include:

  • "...if the cardholder is reported as delinquent on an account with any other creditor, we may increase the APRs on your account up to the maximum default APR."  This is what is known as the universal default clause and acts as a way for the issuer to raise the cardholder's APR for delinquencies on other accounts.
  • "Disputes relating to the account are subject to binding arbitration."  The inclusion of this phrase in the terms and conditions protects the credit card issuer from lawsuits and class action suits.  If the cardholder has any problem or dispute regarding their account, they are limited to an arbitration hearing. The arbitrator is chosen and hired by the card issuer, and the cardholder's legal options are severely restricted. Most credit card offers now include this provision.
  • "Balance transfer fees are added to the purchase balance and are subject to the APR for purchases."  This phrase states that the fees you pay for a credit card balance transfer are added to your any balances from purchase activity and you are charged interest on this combined total.
  • "The introductory APR does not apply to bank and ATM cash advances."  Generally, a higher cash advance APR is applied to these balances. What's worse, if you have a a balance that includes two APRs -- split between a lower purchase rate and a higher cash advance rate -- payments likley will be applied to the lower rate first. That practice keeps the higher rate debt lingering longer, raising the cost to you.

Credit cards that are described as "fixed-rate" contain information in the terms and conditions explaining that going over the limit can automatically change the rules to your account by significantly boosting your interest rate. Remember that "fixed" rates can be changed at any time by the card issuer, with just 15 days' notice.

When a card is said to use double-billing cycles (or two-cycle billing), this means that the interest is calculated on the balance you hold over the two prior months, as opposed to being calculated on the average daily balance for one month.  As a result, consumers end up paying more interest or finance charges on credit cards that use double-billing cycles.

Meanwhile, although fees are usually defined in the Schumer box, they are generally easy to read and compare to other offers. Fees can add up quickly, so it is important to know what types of fees are associated with each card offer you are considering and the amount of each fee.

While reading credit card fine print disclosures is not most consumers' idea of a good time, it can save serious aggravation and money down the line.  So, be an informed consumer and make sure you know what's involved before completing an application for a new credit card.

Updated: May 9, 2008


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