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Decoding lending disclosures Part 1: The cardholders agreement

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By: NathanielCopeland
on 21st Nov,2012

A contract or an agreement says more in the fine print than with the bold letters and it is the fine print that most people skip out on reading.
Decoding lending disclosures Part 1: The cardholders agreement


You apply for a credit card or a mortgage, jump through the usual hoops, shop around for better rates, go through the usual credit report inquiries and wait around patiently with your fingers crossed for the issuer or the lender to approve your application. After the loan and harrowing process, you just want to get it over with and almost reflexively, sign on the dotted lines on the card or the loan agreement contract.

A contract or an agreement says more in the fine print than with the bold letters and it is the fine print that most people skip out on reading. The lines after lines of text appearing on the back of your copy of the contract is so important that it has been Federally legislated through the Truth In Lending Act and it is aimed at disclosing certain facts for your knowledge, before you sign on the dotted line and after.

The disclosure exists solely to provide you with information but the science of making wise and well informed financial decision rests upon the way you use this information. Let us deconstruct and decode the cryptic fine print:

Cardholder's agreement

The terrible mistake of skimming through the information disclosure printed on your credit card agreement is like setting up a time bomb and will hurt you financially when you least expect it to. Some of the notable details appearing in fine print are:

    Annual percentage rate (APR) - Generally people take note of the APR in relation to the balance of the borrowed amount. Card issuers also disclose the different APRs applicable for balance transfer, defaults, cash advances and introductory offers (which usually change after a certain period). The most important thing that you need to figure out while reviewing the disclosure is if the APR is fixed or variable.

    Finance charge - The disclosure should also carry information about the minimum applicable finance charges which would be payable in case the calculated finance charge for a certain month falls below the set minimum. For example, in case your card usage attracts finance charge of $1, your credit card agreement's disclosure should clearly state the minimum amount you are liable to pay.

    Basis of balance calculation - The method of calculating the balance varies from one card issuer to the other. The agreement disclosure would clarify if the math is based on the average daily balance or the previous account balance. Calculations are also times, stretching over either one or two billing cycles.

    Fees and charges - Everything including the annual maintenance charges, balance transfer fees, cash advance charges, over limit usage fees, late payment fines are declared through the cardholder's agreement disclosure. Study it carefully or you might get caught by surprise when you see a few hundred dollars extra being added to your bill.

    Grace period - Maintaining a good FICO score and a clean credit report depends a lot on paying your bills on time and as such, a lot of card issuers offer a grace period within which you can catch up with the payment without the lapse going on your record. The grace period is the certain number of days (from the date you are actually supposed to pay the bill) within which you should pay up in case you want to avoid paying the late fees, finance charges and face a higher APR on the balance owed.

Credit cards are an essential part of your personal finances and are simply indispensible in this day and age. Although a bare necessity, it can also turn around and become the harbinger of financial ruin, unless of course you are informed about each and every tiny detail. As the saying goes “When you deal with the Devil, read the fine print.”

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