Unlike when you update your favorite music streaming service, you should definitely read and understand your credit card terms and conditions before agreeing to anything. Like any contract though, you may get anxious just thinking about all of the legal jargon that will be loaded into your credit card terms. All it takes is a little knowledge to unravel the word jumble that is your T&Cs, as you soon will see.
What are the terms and conditions?
If you know what you’re looking at, there’s no reason to be intimidated by the terms and conditions that your credit card company has put together. Sometimes known as a cardmember agreement, disclosure, or your cost information page, terms and conditions are simply the guidelines that are agreed upon by a credit card issuer and you, the credit card user. Your T&Cs include all of the important information needed to understand how your credit card works, including details on fees and any rewards program tied to your card. While it may appear like a lot of data to digest all at once, the key things that you need to know about your credit card can be found in what is known as a Schumer Box.
What is a Schumer Box?
Though you may not know it by name, if you’ve ever quickly glanced at the terms and conditions of any credit card, then you’ve seen a Schumer Box. A Schumer Box is a table in the terms and conditions document of your credit card that clearly shows the rates and fees associated with it. Though it didn’t come into effect until the year 2000, under federal law, the 1968 Truth in Lending Act standardizes the formatting in which credit card info is presented so that it is easy to read and understand. The Schumer Box is named after New York Senator Charles Schumer, who was responsible for the legislation. In a Schumer Box, you will find information such as:
- A credit card’s annual fee
- Annual percentage rate (APR) on purchases, balance transfers, and cash advances
- Introductory rates for interest charges on purchases, balance transfers, and cash advances
- The number of days that are included in your interest-free grace period for new purchases
- The minimum amount that must be paid to avoid being past due on your billing cycle’s due date
Other finance charges are listed in the Schumer Box as well, so it benefits you to both be able to identify them and actually know what they mean.
What do these terms mean?
Now that you know what a Schumer Box is, the next step in understanding your credit card’s terms and conditions is learning what the terms used mean. While they may sound alike, knowing the difference between your credit scores and credit reports, for instance, can eliminate a lot of the confusion associated with reading T&Cs. Some basic terms to keep in mind include:
- Annual Fee – A fee charged every calendar year to cardholders by credit card issuers for owning and using a credit card. Annual fees are most common on secured cards and credit cards that offer multiple incentives, such as rewards programs.
- Annual Percentage Rate – Also known as “APR”. A rate in which interest charges for a credit card or a loan are calculated annually and applied to a consumer’s account each month he/she carries an outstanding balance. This rate is calculated as a percentage and combines payable interest as well as other fees and charges.
- Balance Transfer Fee – A fee charged when transferring a balance from one credit card to another. Issuers generally charge a percentage of the transferred amount when said transfer is made.
- Prime Rate – Also known as the “prime lending rate”. The interest rate that preferable customers not likely to default are charged by banks. The prime rate is 3% above the federal funds rate as determined by the Federal Reserve.
- Returned Payment Fee – The fee that an account holder pays to a financial institution, such as a bank, when a check they have written has bounced while trying to pay for goods or services at a merchant point of sale.
- Variable Interest Rate – Also known as a “floating rate”. A fluctuating interest rate calculated using an index that can go up or down, in turn increasing or decreasing interest payments on your loan or credit card.
If you come across a word in your terms and conditions that you don’t understand, we’ve put together a comprehensive glossary of all credit card terms.
Should I still read the fine print?
Credit cards offer you a way to pay for goods and services without immediately using your personal funds. Over time, responsible use of these financial tools can build up your creditworthiness, which is the trust that institutions (such as banks) require in order to increase your credit limit, giving you the ability to make bigger and bigger purchases. Because this process affects your likeliness of acquiring loans for big-ticket buys like houses and vehicles, you should absolutely read the fine print each and every time you consider applying for a new credit card. Aside from the fees you may be charged, reading the fine print surrounding the Schumer Box on your terms and conditions page will also give you insight into the card rewards that you may have been earning with your purchases… as well as those you’ve missed out on. If the thought of reading pages filled with financial text doesn’t get your attention, the free trip to Europe that you may have earned through accumulated airline points surely will.