Things you should know about your credit card | Consumer credit | Financial Literacy | Khan Academy

You're likely already familiar with the idea of a credit card. You know that you can go to a store and buy things with your credit card. But what we're going to do in this video is go into a little bit more detail on exactly what's happening and what are you getting yourself into when you use a credit card.

So you probably are also used to the idea that when you buy with a credit card, you're essentially borrowing money from the credit card issuer. You could either pay that back by your next due date or you continue to pay interest on it. And what we have here on the left-hand side, this is known as a Schumer box. It's named after Chuck Schumer, who's the senator from New York, and there's part of legislation that said, "Hey, you always have to provide a Schumer box to folks so that they can see what they're getting into when they use a credit card or so that they can compare credit cards."

So let's break down this Schumer box right over here for this given credit card. The first thing you might notice is annual percentage rate for purchases. This is really important because this is a measure of how much interest you're going to be paying. The way it's normally calculated, it's your monthly interest plus fees and other things times 12. You can see this range here, 11.99 to 28.99 percent. It says based on credit worthiness, so if you don't have a good credit score, you're likely to have to pay at the high end of that. That is a lot of interest; we're approaching 30 percent APR. If you have a good credit score, it's closer to about 12, which is still pretty high interest.

So the big takeaway is, credit cards tend to have high interest. Another thing—and we'll go into more detail in other videos—it actually turns out if you have a balance on your credit card and you were to just keep paying the minimum, you'll actually pay a higher effective interest rate than these things right over here. Now you'll see a little bit more detail here that you have a different annual percentage rate for transfers and cash advances—cash advances. It's a little bit of a tongue twister.

So the first one is when you just go buy something at a store. These are probably less likely to be used, but some people use them. For example, if you were to transfer money or if you're transferring a balance from one credit card to another, then you're going to have to pay this interest rate. Notice at the low end here it's lower because the credit card companies like it when you transfer balance from another credit card to your credit card because now they can collect the interest. Now cash advances, no matter how good your credit rating, at least in this scenario right over here, you're paying a really high interest rate because here they are just directly lending you cash.

So another thing to realize is that this is a variable rate. When you see it's based on the prime rate, they also say right over here that it's prime rate plus someplace between 6 percent or 5.99 to 13.99. These are all clues that that credit card rate can change based on what is going on with the prime rate. Now if, for whatever reason, you make a late payment—which I do not recommend—then there is a penalty APR, and they'll tell you when it applies. Here, that penalty APR, notice it’s higher than any of this. No matter how good your credit rating is, you're going to pay a lot higher of an interest or an APR if you don't pay on time, and it will probably hurt your credit rating as well.

Now, last but not least—oh, actually, it's not even last; I'm going to talk about fees in a second—we have this thing called grace period. This is a time period where, within that grace period, you don't have to pay. If you don't pay in that period, then you are not going to be charged interest. It says here you have a 28-day grace period. Your due date will be a minimum of 21 days after the close of each billing cycle. It's good to know when that close of that billing cycle is and what 21 days after that is. We will not charge you interest on purchases if you pay your entire balance by the due date each month.

Just so you know, I try to pay my entire balance by the due date each month. If I can't pay the entire balance by the due date each month, then I personally don't want to use my credit card because I don't want to pay interest rates like that. But that's just for purchases. They say we will begin charging interest on balance transfers and cash advances on the transaction date. So, essentially, you don't get a grace period, according to this Schumer box, for things like balance transfers and cash advances, and that's pretty typical—you only have the grace period for purchases.

Now, above and beyond that, we can see other things here. There's an annual fee you have to pay just to have that credit card, and then there are some transaction fees if you get advances or if you're using your card in a foreign country and they need to convert behind the scenes between U.S. Dollars and something else. Then above and beyond the penalty when you pay late, there is a late fee up to $39.

So whenever you're getting a credit card, if you already have a credit card, find the Schumer box or the equivalent information, and hopefully now you know how to dissect it.