Advice to New Credit Card Users

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The son of a friend of mine is at the age where he’s getting his first credit card. My friend and I were talking about how to teach good credit card habits. She was wary, just because she had some credit issues in the past and didn’t completely understand how to approach the subject. She knew it was important to pay off credit cards in full each month because otherwise there were fees, but she didn’t quite understand how much interest would be charged if there was a carried balance.

This led me to two simultaneous thoughts: 1) I applauded my friend for wanting to become not just fiscally responsible, but financially educated, and 2) how our American school systems fail us by not teaching these basics in class.

So, today we’re going to focus on Credit Card fees and APRs – Annual Percentage Rates just going over the basics that you need to know:

Annual Fee – This is a yearly fee charged to you for the joy and privilege of having the card. Ideally, you want a credit card that has no annual fee, and some kind of cash-back or airline mileage bonus (if you travel a lot), so you can get a little extra with your purchases. Don’t expect to get rich off of these perks – usually you’re earning about $1 for every $100 you spend.

Billing Cycle – This is the number of days between your last statement and current statement. Usually, it’s about a month long, and some credit card companies start the billing cycle right when you’re approved, or on a month-to-month cycle, others let you set your own cycle date. For example, your billing cycle may run August 14^th-September 13^th, or it could run August 1^st-August 30^th. It all just depends on your lender.

Closing date – This is the date that your billing cycle closes on your credit card. Usually it’s every month around the same time. If your billing cycle is August 14^th-September 13th, the closing date is September 13^th.

FUN FACT: Your closing date is generally when your credit card company reports your balance to the credit agencies. If you pay off your balance BEFORE YOUR CLOSING DATE, it will appear as a $0 on your credit report! This is handy when you’re looking to get a loan because if your debt is low, your credit score will be high! (And you’ll qualify for lower interest rates, saving money over the long term.)

Due date – This is the date that your payment is due. If you pay beyond that date, then you will have to pay extra fees and interest. This date is usually about 2 weeks after your closing date. So, if your billing cycle runs August 14^th-September 13^th, your due date may be around September 27^th.

Grace period – This is the time between your closing date and your payment date, in which you have time to pay your bill without interest or fees. In our example, if your billing cycle runs August 14^th-September 13^th, and your due date is September 27^th, your grace period is September 13^th-27^th.

Minimum Payment Due – This is the minimum amount due to the credit card company to avoid penalties and fees. This is usually 1-3% of the balance due with a minimum of around $25. So, if your bill is for $1867, with a 2% minimum payment, you would have to pay at least $37.34 (although they would round up to an even $38) to avoid a penalty. However, you would still accumulate interest on the unpaid balance of $1829.

Late Fees – These are one-time fees that you will incur if you pay your bill (in full or not) past the due date. They run from $29-$49 and more! There may be language in your card agreement that if you incur late fees, your interest rate will also go up – this is called a Penalty APR.

Purchase APRs (Annual Percentage Rates) is the ANNUAL interest rate that a credit card company will charge you for balances carried beyond your payment due date. Some cards (like through credit unions) have lower APRs like 9.99%, some have high rates like 24.99%. You can find your APR by logging into your account and searching for it, or calling up your credit card company and asking them directly. If you don’t carry a balance, you don’t have to worry about APRs. But if you do carry a balance, you can get an estimate of how much you’ll be paying in interest by taking the balance amount, multiplying by your APR, and diving by 12.

For example: If you’re carrying a balance of $1,234 and your APR is 18.99%, then:

$1,234 x 18.99% = $234.33
$234.33/12 = $19.53 per month

The obnoxious thing is that your interest will be compounded, which means not only are you paying interest on your credit card balance, you will also be paying interest on any fees or accumulated interest that you don’t pay off each month.

Your credit card company may charge different APRs for different usage:

Balance Transfer APR – if you transfer a balance from a different card or loan, this is the APR that will be charged for those transactions. This can be equal to your current APR, or the credit card company may be running a limited 0% balance transfer offer for a set period of time (usually around 12-15 months) with an additional fee (usually 3-5% of the balance transfer amount.) If you carry a balance transfer past it’s set time frame (if there is one) you will then have to pay your regular APR.

Introductory APR – If you open up a new card, sometimes the lender will give you a 0% APR for a set length of time so you’ll start using the card. If you carry a balance past that introductory time period (usually 6-12 months) you’ll then have to pay your regular APR on that balance.

Cash Advance APR – Don’t do this. This is if you need cash, so you take a cash-advance on your credit card. These are usually insanely high rates (34% on a few of my cards!) and in some cases they start earning interest immediately – no billing cycle, no grace period.

Penalty APR – This is the APR you may be charged if you pay your bill past the due date.

I know this may seem a bit overwhelming – the best credit card advice I can give is to make sure that you use your card for convenience. That you could pay with cash if you bothered to go to an ATM, but it’s easier to use a card, so there’s never an issue paying in full every month.

If you can’t do that, be smart about what you’re spending your money on (like if you need to eat!), and just do the basic math so you understand the extra fees that go along with accumulating credit card debt. And most importantly, trust in your own ability to get yourself out of whatever temporary debt you may have to incur due to a job loss, illness, or pandemic.