Credit Card Confidential

Knowing your card’s mechanics can help you avoid high rates and fees.

-  LISA GERSTNER

You probably know that your credit card comes with an interest rate, a limit on how much you can spend and a minimum amount that you must pay each month. But if you’re not familiar with the nuts and bolts of each card component, take a little time to brush up. Knowing the types of activities that trigger a cash advance, for example, could save you a bundle in interest and fees, and smart use of the grace period lets you finance a purchase interest-free for several weeks.

Annual percentage rate (APR). If you don’t pay your statement balance in full by the payment due date, you’ll accrue interest on the unpaid amount (unless your card is charging a 0% APR for an introductory period). Recently, the average rate ran about 17%, according to the Federal Reserve. But many cards come with a range of possible APRs, and the customers with the strongest credit histories capture the lowest rates.

Most credit cards have a variable rate, typically composed of the prime rate plus a “margin” of a set number of percentage points. Each time the Federal Reserve changes the federal funds rate, the prime rate moves in tandem. In the second half of 2019, the Fed cut rates three times, each cut one-fourth of a percentage point. As a result, many cardholders saw their APRs fall by a total of 0.75 point. When a variable APR changes because of an increase or decrease in the underlying index, the new rate applies both to existing balances and new purchases.