6 things you need to know about getting a new credit card

October 15, 2010

By Barbara Marquand | Money Rates Columnist

When your shiny new top credit cards 2012 arrives in the mail, you might be tempted to take it for a quick retail spin.

But first, take a few moments to check the credit card agreement and get acquainted with the terms, especially if this is your first account. Here are the six things you need to know before your first shopping date.

1. Know your credit card rates

Credit cards typically charge different interest rates for different purposes, such as purchases, cash advances and on zero balance transfer credit cards, and transferring balances from other credit cards. Check the interest rates for each, so you know what you'll be charged for each type of transaction. Your card might also come with a low introductory or promotional rate. Understand when the introductory period ends and how much you pay after that. And know whether the rate is fixed or variable. A variable rate is tied to an index, such as the prime rate, and moves up and down as the index rises and falls.

2. Annual fee

This is how much you pay just to maintain the account. Some credit cards still come with no annual fee, but as credit card companies scramble to make up lost revenue from complying with new credit card regulations, a growing number are quietly reintroducing annual fees.

3. Other fees

Besides an annual fee, credit card companies often charge fees for certain transactions, such as getting a cash advance, using a convenience check, or charging a purchase in a foreign country.

4. Grace period

The grace period is the amount of time before you start accruing finance charges. Virtually all credit card issuers don't charge interest on purchases as long as you always pay your bill in full by the due date. Be aware there is usually no grace period for cash advances or convenience checks - interest starts accruing right away - and you lose the grace period on new purchases if you carry a balance from month to month.

5. Credit limit

This is the maximum balance you can carry on your card. Keep your balance below 30 percent of your credit limit to protect your credit score.

6. Penalties

New Federal Reserve rules that took effect August 22, 2010, limited penalties to what is "reasonable and proportionate" to the mistake. Still, it's best to avoid them altogether. Late fees in most instances are capped at $25 and cannot exceed the minimum due on your account. You must give your credit card company permission to let you exceed your credit limit and charge you a fee for it. Over-limit fees can't exceed the amount you go over your limit.

But there is no legal cap on how high your penalty interest rate can go if you're late on your credit card bill by 60 days or more. Penalty interest rates are often double the regular rate.

Know the terms of your credit card to avoid costly transactions and mistakes and make this the start of a healthy financial relationship.

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