I have long been a proud deadbeat. In the credit card world, a deadbeat is a person who pays off their balance in full on time every month, so they enjoy the benefits of a loan without paying any interest. But even though I’ve religiously paid in full, there were some things I never knew about the cards I carried. Here’s what you need to know whether you’re a new card holder or a long-time deadbeat like me.
Credit limit
My first credit card, one that I applied for because I wanted a free t-shirt, had a credit limit of $500. I was unproven and the company was taking a risk by offering me credit. A credit limit is just what it says – how much you can charge on the card. Note that it’s not just purchases; balance transfers, fees, cash advances, and interest also add into this total. If you develop a positive history of on-time in-full payments you can request a higher limit – or the card will reach out to raise your limit. Additionally, with a better credit history those small credit limits when you were young will be a thing of the past. The last time I applied for a new credit card, the limit was much higher.
Grace period
The grace period is the amount of time you have from when you make a purchase on your card until you have to pay for that purchase without incurring interest. Often between 21 and 31 days, this can be considered a free loan if you make your payments in full and on time every month. However, only purchases receive a grace period. If you take a cash advance (more on that later) you will start paying interest immediately.
Annual percentage rate
Your credit card will charge you interest starting the day after your bill is due and not paid in full. For instance, if your $800 credit card bill is due on June 8 and you make the minimum payment of $35, the card company will charge you interest on the remaining $765 (plus any new purchases). Essentially, you lose your grace period and will be required to pay interest if you do not make a full payment on your credit card each month. Annual percentage rates (APR) range from the mid-teens to 24.99% or higher, usually depending on your credit history.
Most credit card companies determine your interest using a daily or monthly periodic rate; the APR is divided by 365 days or 12 months to determine the rate for your purchases.
Minimum payment
As noted above, you can choose to make only the minimum payment required by the credit card company. On the bill near the “new balance” will be a minimum payment total. If you pay this amount, your loan will not be sent to collection for non-payment, but as noted above you will start paying interest on your outstanding balance and any new purchases.
Cash advance
It’s so tempting to use your credit card at an ATM. Try your best not to do that. In addition to charging a fee for the loan, you will start accruing interest immediately (even if you pay your bill in full every month). The APR for cash advances is normally significantly higher than for purchases. Both will be listed on your statement.
However, it’s not just actual cash that can trigger a cash advance fee/interest payment. “Cash-like transactions” also fall under the cash advance category. These can include purchasing travelers checks, foreign currency, or cryptocurrency; purchasing lottery tickets or casino chips; and person-to-person money transfers (think Venmo). Even funding a new bank account using your credit card may be considered a cash advance.
Fees
In addition to paying interest, it’s easy to trigger other fees when you use a credit card:
Cash advance fee. Since I’ve just referenced this, I’ll start here. Cash advance fees on average are $10 or 5% – whichever is higher – of the amount you withdraw. For instance, if you withdraw $100, your fee would be $10 (since 5% of $100 is $5). If you needed $500, your fee would be $25. Remember, this fee is assessed the moment you take a cash advance.
Annual fee. The annual fee is often listed as an “account maintenance fee” that cards charge you every year for the right to carry the card. Many cards charge no annual fee so make sure you need a card with one. The key here is to reap more in benefits than the fee amount. So if you fly one airline regularly and check baggage on each trip, a $95 annual fee for a card that includes free checked baggage would be worth it after two flights if the airline charges $50 per flight for your luggage.
Foreign transaction fee. Usually 3%, this fee is added onto your purchases made in a foreign country (or on a foreign website). While this might not seem like much, if you spend $1,000 on souvenirs, food, and groceries, that’s $30. If you plan a trip, finding a card with a zero foreign transaction fee isn’t difficult.
Late payment fee. If the credit card company doesn’t receive your payment on the due date, you may be charged a late payment fee. These range from $25 to $40. If you regularly send in your payments on time and you forget one month, contact your card company to see if they will waive the fee.
When considering fees, think about what you need the card for. As noted above, if you travel on one airline, consider paying for an airline-specific card if you will use the benefits. Look for alternatives to making a cash advance, even if it means sending a check snail-mail to open an account. And try to make full payments on time every month. That way you’re using their money for free – you can be a deadbeat just like me.
Photo by Susan Holt Simpson