Credit card mailers and banner ads offer a dizzying array of perks, from low introductory interest rates and free balance transfers to cash-back offers and travel rewards. But buried beneath the headlines is the ugly fine print, where you’ll learn the real story behind those promotional offers.
Of course, not all credit cards are bad, but it’s important to understand the terms and conditions of perks that may seem too good to be true. Start here for a quick tutorial on understanding the fine print on credit card promotions:
• Low introductory interest rate: A low or even zero introductory rate is a common promotional offer that attracts many consumers, but the key word here is “introductory.” Generally, this low rate is good for only a few months before it jumps to a much higher rate, though some cards’ introductory rates are good for 12 months or more. Read the fine print to find out how long the promotional rate will last.
• Balance transfer: This one seems like a no-brainer. Transfer balances from high-rate cards to a low or zero-interest card and immediately save money in interest. However, the fine print will reveal that balance transfers incur transaction fees, often three percent of the total dollar amount transferred. Do the math before transferring balances to ensure your savings are higher than the fees. It’s also important to learn when the low balance transfer rate will turn into a much higher regular rate.
• Cash advance: Perhaps the most enticing offer is the credit card mailer enclosed with preprinted checks, especially if you’re short on cash and need money right away. But just like balance transfers, the cash advance also carries transaction fees and an introductory rate that will soon expire.
• Rewards: Rewards-based cards are more popular than ever, with people using credit to gas up, buy groceries or book travel with the promise of earning cash back. It seems simple and straightforward, but the fine print exposes rather limited rewards. For example, some cards promise five percent cash back when you use your card in specific categories – but only on your first $300 in purchases. In other words, you max out at only $15. Some credit card rewards programs are better than others, but read up before you begin using a rewards card.
• Penalty rates: That unbelievably low introductory, balance transfer or cash advance rate will skyrocket the first time you’re late on a payment. You’ll also be slapped with a late fee, usually to the tune of $25. Read the fine print to understand what will happen if you’re late paying your credit card bill. Better yet, make payments on time, with the goal of paying off your balances altogether.
• Variable rates: Most mortgage rates are fixed; most credit card rates are not. Read your credit card agreement to learn whether or not your rate is “variable,” meaning it will increase without notice if the prime rate goes up. Even if your card is advertised as fixed rate, the fine print usually indicates that the rate is fixed only for 12 months, and then is subject to increase as long as your credit card company provides 45 days’ notice.