How To Read The Application Fine Print

You've probably heard it said before: "Never sign anything without reading the fine print." Nevertheless, nearly everyone skips right past the fine print and either signs most documents or, as is the case more often these days, creates new accounts on websites while pretending they read the user agreement.

In most cases, this is not too bad. When it comes to signing up for a new credit card, though, we will say this: read the fine print! Companies will advertise any number of rewards and benefits, and they'll even provide a relatively detailed page about what all of that means. You'll find they all use the same format when it comes to the "Terms" section, but couched at the bottom of that page in extra small print are the details that may make you reconsider your options.

So what are they hiding down there? It's not as nefarious as it might seem, but it's worth your time to check it out before you sign up. Here's what you'll typically find when you pull out your magnifying glass to read the application's fine print.

Where to Find the Fine Print
Two relevant sections deserve your attention: Offer Details and Pricing and Terms. The Offer Details section is the "fine print" for the rewards, while the Pricing and Terms are where you'll find out how much it will cost you to use your card.

Offer Details
Most cards offer different rewards and benefits, so what you'll find here may range from reward limitations for specific offerings to exclusions for certain individuals and regions.

Take the popular Discover it card, for example. The highlights are the following rewards and benefits:

5% cash back in rotating categories
1% cash back on all other purchases
Cashback Match for the first year
Redeem in any amount, at any time
No annual fee
0% Intro APR for 14 months (11.49% to 23.49% variable after)
3% fee for each balance transfer

The rewards and benefits seem simple enough. Of course, there are details you'll want to consider. Down the page, Discover explains those rewards in more detail. In particular, where the limitations of those rewards exist.

For the Cashback Match, for example, certain conditions exist (such as your account status changes during the 12-month billing cycle) that would mean you don't get the reward. If you're not a brand new customer, but perhaps a returning customer, you don't get that benefit.

For the 5% and 1% cash back rewards, there are limitations there as well, although you have to click through a few more pages to find that fine print. There you'll discover that for gas stations purchases, some supermarket gas stations may not count toward that reward, or that purchases on ground transportation, such as car rentals, won't count if you make the purchase through a travel agency or travel aggregator website. You'll also find that the 5% cash back reward has a spending limit during the rotation period: $1,500, to be exact.

Most rewards programs have conditions like these in the fine print, so it's important to seek out those limitations. You may discover that the way you use the card would not reap the desired reward benefits.

Pricing and Terms
Some companies may call this something else. Discover calls is "Important Information," while Chase calls it "Pricing and Terms." However, the general structure of the information here is always the same. It will start by telling you what your Annual Percentage Rate (APR) for purchases will be, and move on from there to detail other pricing terms and conditions.

In this fine print area, you'll find all of the following:

Purchase APR
Balance Transfer APR
Cash Advance APR
Penalty APR
How to avoid paying interest on purchases
Where to find Consumer Financial Protection Bureau information
Annual Fee
Balance Transfer Fee
Cash Advance Fee
Late Payment Fee
Returned Payment Fee
How the company calculates balances
How the company calculates APR
How balance transfers work
How the company allocates payment on outstanding balances
What information they use during the application process
How your credit line is determined
Cardmember agreement information (e.g., your legal rights and responsibilities)
Rewards information
Information on FICO credit score and its use
More information about very specific offers and rewards

Yes, the company will pack a lot of information in here. Yes, you should read it. Some of it will be standard across the different credit cards, so it does come down to a case of "if you've read it once, you've read it all." However, you will want to pay attention to how companies differ in specific ways.

For example, not every card is going to have the same Payment Allocation method. For the Discover it card, Discover notes that when it comes to payments on outstanding balances,

"We apply payments and credits at our discretion, including in a manner most favorable or convenient for us. Each billing period, we will generally apply amounts you pay that exceed the minimum payment due to balances with higher APRs before balances with lower APRs as of the date we credit your payment."

What does this mean? It means that Discover will allocate those payments any way they want that best fits their bottom line. If you've ever felt like your credit card balance never seems to disappear, this sort of policy can explain why. Discover openly admits here that if you pay the minimum, that payment will only go toward paying accrued interest, and not the balance. If you keep paying minimums, you'll be paying on that balance for a long time. However, they do explain that anything above the minimum payment will go toward balances with a higher APR, which is beneficial for the user.

In general, this section is important to read as it will help you understand what limitations might exist for certain states during the application process, as well as how much you may end up paying in the end. If you're paying your balance off at the end of each billing cycle every time, most of this won't affect you too much.

Do pay attention to the section detailing how to avoid paying interest on purchases, and the section that explains how they calculate and determine rates. How to avoid interest will give you a good idea about how many days you have after the billing cycle is over to make the payment before interest starts applying, while understanding how they calculate and determine rates will give you a better idea of what the true interest rate will be.

The latter, how they calculate rates, is necessary. Different companies calculate this in a variety of ways. Chase, for example, calculates it by adding a Prime Rate that may be several months old. Discover uses the highest U.S. Prime Rate listed in The Wall Street Journal each month, which means your APR may vary between cards. For its Freedom card, Chase also explains that their APR will never exceed 29.99%. Discover gives no such APR limitation promise.

As you can see, the fine print for different credit cards may be very revealing. It may even help you make a better choice among multiple products. Reading the fine print might not be fun, but it could save you a lot of money in the end.

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