Tip of the Month: Always review your credit card agreement.

Opening any line of credit is a major financial decision. Always make sure that you understand the terms of your credit card agreement.

Since the use of credit cards are so common, many people do not think that opening a new trade line is a serious financial decision. However, any decision that could potentially affect your credit score should be treated with care.  One essential step to any new line of credit is to understand the terms that you agreeing to. 

A credit card agreement is a document that explains the rules of your account. The credit company will typically mail the credit agreement to you after you open the card. They should also mail you a copy of a credit card agreement if your credit limit increases. Keep copies of your credit card agreements, like you would any other important financial document.

When you review your credit card agreement, pay attention to:

1. Annualized Percentage Rate or Interest Rate (APR)

The APR is the interest rate that is charged on any balance that you carry over if you do not pay your balance in full each month. Usually, your credit card’s APR is determined by your credit score at the time of your application. Normally, a lower credit score means that your card will have a higher APR. 

Be sure you understand the conditions around your APR.  Is it variable (does it change from month to month)? Is it fixed (remains the same each month)? Can your APR increase as a result of late payments?

2. Fees

The credit agreement will also outline fees that the credit card company will charge. Some common fees include:

o   Annual fee. This fee is charged to the cardholder each year for the convenience of having the card. The annual fee is a separate charge from your interest rate. 

o   Late Payment fee. A fee, which usually ranges from $25-$35 for paying your bill after the due date. Late payments may increase your card’s interest rate and negatively affect your credit score.

 

The agreement will include other terms, like the account default policy and a glossary of terms that are used in the document.

Reach out to your credit card company or Compass coach for more information and questions about your credit card agreements.