If you're like the majority of Americans, you have a credit card1 and you use it to shop online, book travel arrangements, eat out, or just take care of groceries and gas.2 Credit cards can help you manage expenses and make the purchases you want and need. But every card comes with an agreement between you and your credit card company, and you should understand the terms, so you know what fees or interest may apply on your purchase.
To use your credit card responsibly, make sure you're familiar with these common phrases:
Annual Percentage Rate
This is the cost of borrowing money. The annual percentage rate, or APR, reflects not only how much interest you pay on your purchases, but also other charges you may pay. It's represented as a yearly amount (the "annual" in "annual percentage rate"), but it's calculated on a daily or monthly basis. For example, with an APR of 26.99% calculated monthly, 2.25% interest would be charged each month—or $22.50 in a month with a $1,000 balance. Sometimes the APR is a variable rate, meaning it changes with an index interest rate such as the prime rate published in the Wall Street Journal, and sometimes it is a fixed rate, which does not fluctuate with changes to an index. Regardless of whether the rate is variable or fixed, all APRs can be adjusted by the credit card issuer , and the cardholder agreement will say how the APR can change over time. However, a card issuer can't change the APR of an existing balance unless it's following the formula of a variable APR that is disclosed in its terms.
Some credit cards offer an "introductory APR," which is a lower interest rate offered for at least the first six months after the account is opened. If a card has an introductory rate, it can be replaced with a higher rate after the introductory period.
The billing cycle is the number of days between billings, usually 28 to 31 days.3 It's important to understand your billing cycle because it's used by the card issuer to calculate your interest payment. Pay attention to your billing cycle so you know when it ends, which is usually the date by which you need to make at least the minimum monthly payment. Because the typical billing cycle doesn't line up with the beginning and end of the month, mark the end date on your calendar so you know when you'll need to pay to avoid late fees.
Most card issuers don't require you to pay off your balance in full each month. Instead, you can pay a lower amount, called a minimum payment, which may be around $25 (but could be much higher).4 Keep in mind, though, that you may be charged interest on the balance, or amount you don't pay off each month. In other words, just because your card allows you to pay a minimum amount doesn't mean that's the best practice for your budget.
If you don't pay at least the minimum payment due each month, your credit card company may charge you a late fee. Fees range anywhere from $15 to $38, depending on your card issuer's policy and the last few months' payment history.5 Making at least the required minimum monthly payment each month is a smart way to avoid extra credit card charges.
Who doesn't love a reward now and then? Hundreds of credit cards come with rewards these days, from redeemable points, to frequent flyer miles, to "cash back" incentives. Each program is different, and they can be complicated. For example, you might be able to use points you earn on dining out to offset the cost of air travel, but only with certain airlines.6 Read the fine print or call your customer service representative to be sure you understand how your card's reward program works.
When used carefully, credit cards may act like short-term loans where you are not charged interest on your purchase if you pay the balance in full by the due date. Credit card companies must mail or deliver their bills at least 21 days before the payment is due.
Get to know your own cards so you can maximize their benefits while managing fees and interest charges.
This content is subject to change without notice and offered for informational use only. You are urged to consult with your individual business, financial, legal, tax and/or other advisors with respect to any information presented. Synchrony and any of its affiliates, including CareCredit, (collectively, "Synchrony") makes no representations or warranties regarding this content and accept no liability for any loss or harm arising from the use of the information provided. Your receipt of this material constitutes your acceptance of these terms and conditions.
1 Shevlin, Ron (2018, March 4). How Many Americans Have a Credit Card? Insight Vault. Retrieved from https://www.crnrstone.com/insightvault/2018/03/04/many-americans-credit-card/
2 TSYS 2016 U.S. Consumer Payment Study. Retrieved from https://www.tsys.com/Assets/TSYS/downloads/rs_2016-us-consumer-payment-study.pdf
3 Irby, Latoya (2018, July 30). What Is A Billing Cycle? The Balance. Retrieved from https://www.thebalance.com/billing-cycle-960690
4 Tsosie, Claire (2018, August 9). How Credit Card Issuers Calculate Minimum Payments. NerdWallet. Retrieved from How Credit Card Issuers Calculate Minimum Payments - NerdWallet
5 Irby, Latoya (2018, August 9). The Consequences of Making a Late Credit Card Payment. The Balance. Retrieved from https://www.thebalance.com/four-consequences-of-a-late-credit-card-payment-961070
6 Harrow, Robert (2018, August 9). What Are the Best Rewards Credit Cards of 2018? ValuePenguin. Retrieved from https://www.valuepenguin.com/best-rewards-credit-cards