How Credit Cards Work

By: Melanie Radzicki McManus  | 

Credit Card Plans

credit card plan terms
This chart depicts how APR, finance charges and annual fees can add up.
HowStuffWorks 2008

Now we come to the core of the credit card selection process — which plan to choose. The costs and terms of your credit card plan can make a difference in how much you pay for the privilege of borrowing (which is what you're doing when you use a credit card).

If you always pay your monthly bill in full, the best type of card is one that has no annual fee and offers a grace period for paying your bill before finance charges kick in. If you don't always pay off your balance each month (and the majority of American cardholders fall into this category), be sure to look at the periodic rate that will be used to calculate the finance charge.


One of the major factors to consider in a credit card plan is whether it has a variable or fixed interest rate, as this can have a significant impact on what you pay to use your card.

Fixed-rate credit cards, which are generally only offered by credit unions and smaller banks, carry an interest rate that's not tied to the economy. The rate generally stays the same, although it may change based on your payment history and other factors. Since the rate is more predictable, you will have the advantage of knowing what your bill will be every month. Should your card issuer decide to raise the rate, the Truth in Lending Act requires the lender to provide at least 15 days'notice. In some states, there are laws that require more notice.

Credit cards with variable rates tie the interest rate to indices such as the prime rate; the one-, three- or six-month Treasury Bill rate; and the federal funds or Federal Reserve discount rate. Because they're tied to the economy, they can change over time. The card issuer doesn't have to notify you of rate changes.

Some financial analysts argue that because a fixed rate can be increased with only a 15-day notice, this plan is not that different from a variable-rate plan, which is subject to change at any time. They advise looking closely at both plans. If you do choose a variable-rate card, check to see if there are caps on how high or how low your interest rate can go. If the lowest variable rate possible on your card, for example, is 15.9 percent, and rates are trending downward, you may want to switch your card to another lender.

In addition to the interest rate, make sure to check out the terms listed in the issuer's disclosure form (usually a small, fine-print brochure). Specifically, look for the information on late charges and over-limit fees. Late fees may run as high as $29 the first time you're late making a payment (as of Jan. 1, 2020, federal law stipulates they can't be any higher), and up to $40 for subsequent infractions. And while over-limit fees are declining in usage, they may add another $25 or so to your bill.

Regardless of which card and plan you choose, you're going to be making payments. Let's take a look at how this is done.