When a shiny new credit card shows up in the mail, what's the first thing you do?
If you’re like most people, you activate it, peel off that sticker, and load it into your wallet like artillery in a spending cannon.
Welcome to adulthood! Image by Sean MacEntee/Flickr.
But what about all that other stuff that comes along with the card? Petite as they are, credit cards usually arrive in thick envelopes, jam-packed with all the information issuers have to disclose by law.
That, my friends, is your credit card agreement, and every time you swipe that cut of beveled plastic, you’re giving two thumbs up to everything therein.
During my first few years out of college, I had no idea what terms like "overdraft protection" or "cash advance" meant.
I paid plenty of fees as a result, some of which I got refunded by calling and asking nicely. But if I’d read and understood my credit card agreement, it would have saved me hours of frustration.
Recently the CARD Act outlawed a few of the worst practices that some credit card issuers use (things like "universal default" and "double-cycle billing"). But no matter what, you do need to know the nitty-gritty details of credit cards before you start swiping. Here are five areas of your credit card agreement that could throw you for a loop if you’re caught unaware.
1. Cash advances
First, you should definitely check out the Schumer box on your credit card agreement, which outlines stuff like annual percentage rate (APR), grace period, and annual fees (if applicable). That’s a good place to start. (If you're like me and you’ve already tossed your credit card agreement, you also can pull up a copy online, either on the Consumer Financial Protection Bureau’s credit card agreement database or on your card issuer’s website.)
Photo by _Dinkel_/Flickr
But here’s something I found out after I’d had a credit card for a while: Many issuers charge a transaction fee for cash advances on a credit card, plus interest that starts immediately, not after a grace period. "Even if you did read all the fine print, that’s something you might not understand,” says Beverly Harzog, credit expert and author of "The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free."
Unfortunately, it’s easy to take a cash advance without even realizing it. For instance, if you overpay your bill and transfer the extra money back to your bank account (as I once did) or you mistakenly use your credit card instead of a debit card at an ATM.
2. Late payments
Grace periods can vary from card to card and not every card has one. Paying your bill late not only damages your credit score, but if you pay more than 60 days late, it could trigger a higher penalty APR. “You could end up with that penalty rate retroactively against your whole balance,” Harzog says.
Plus, your issuer could revoke any rewards you’ve earned (buh-bye, Bermuda trip!). "If you do make a late payment, call the issuer right away and let them know what happened," Harzog says. "If you’ve got a good payment history, they might not do anything to your rewards."
3. Fees on top of fees
You probably know you’ll be charged interest on any unpaid balances. But what about things like balance transfers, foreign transactions, and overdraft protection? Alas, you don’t even have to leave your home country to get hit with a foreign transaction fee, I’ve learned. If you’re ordering online from a company that uses a foreign bank, the fee may still apply and it typically adds 1-3% to your transaction.
Photo by wsssst/Flickr.
With a prepaid or secured credit card, your issuer may also charge you a monthly fee and other fees that you may not expect unless you read the agreement closely. Knowledge is power, people!
4. Mandatory arbitration
If something goes wrong, you can always take them to court, right? Power to the people! But not so fast ... some credit card agreements actually strip you of this right, so if something goes wrong, you can’t sue them in court. Instead, a third-party arbiter would rule on your dispute and their decision would be binding.
In some cases, you even have to pay filing fees if you initiate the claim. Total lame sauce!
5. Terms are subject to change
Now that you’ve untangled the terms of your credit card agreement, here’s the kicker: Almost everything is subject to change. That’s right: card issuers can devalue your rewards, increase your APR (although usually not in the first year you have the card), or remove perks like warranty coverage or travel accident insurance.
For most changes, they must notify you in writing, so don’t toss any communications from your credit card issuer before reading it thoroughly. If you have a card with a low introductory APR, the card issuer doesn’t have to notify you when the introductory period ends and a higher APR kicks in automatically.
The bottom line: Read your credit card terms carefully, no matter how boring they are.
That's true adulting. “If you don’t understand something, call the company and ask,” Harzog says. “If the customer rep doesn’t understand, ask to speak to their manager.”
It's better to spend a few minutes familiarizing yourself with the agreement and to walk away armed with knowledge than find out the hard way about late payment fees or penalty APRs. Take it from someone who's been there.