Charging Ahead With the Right Credit Card
Thousands of banks and other institutions offer countless different
types of credit cards. Some differences are literally just cosmetic,
while others represent benefits or cost-savings that may surprise
you. It's important to remember that all credit cards are not
created equal.
Before
evaluating a specific choice, ask yourself if a credit card is right
for you at this time. If you don't have the means to pay off the
items you charge in a reasonable amount of time, it might not be
your best option. If you decide a credit card makes sense for you,
it’s time to start shopping for the card with the best features.
The most
fundamental differences between cards are also the areas the
represent the most variation in cost to you: interest rate (APR) and
annual fees. All credit card issuers are required by law to provide
standard informational disclosures that can be used to compare rates
and fees. Keep in mind, however, that these are “baseline” figures.
In other words, applicants whose credit is either exceptional or
slightly below par will be offered more or less favorable terms as
appropriate.
Annual Fee
If you plan to pay your balance in full each month, shop for a card
that has a grace period and carries a low or no annual fee. Even if
the interest rate is higher, it will not affect you because you
won't be carrying a balance.
Interest Rate (APR)
If you think you'll be carrying a balance, look for a card with a
low interest rate. The annual fee may be slightly higher, but in the
long run it will be cheaper than paying high interest rates on your
balance.
Take a look
at how a 6% difference in the interest rate impacts the cost of
repaying a $1,000 charge making a small minimum monthly payment:
|
Balance |
Interest Rate |
Minimum
monthly payment |
Years
to pay off |
Total
interest paid |
|
$ 1,000 |
18% |
$ 20 |
7 years
+ 7 months |
$
803.97 |
|
$ 1,000 |
12% |
$ 20 |
5 years
+ 9 months |
$
373.43 |
Credit
Limit
If a high credit limit might create a temptation to spend, ask your
credit card issuer to set your limit to a lower, but still
realistic, number. This way you'll have to make a conscious decision
to go charge beyond that limit after requesting an increase, rather
than giving in to a spending binge.
Evaluating a Credit Card Offer
By
gathering this core information about each credit card you wish to
evaluate, you will find some obvious choices are revealed during
comparison.
- What is
the annual percentage rate?
- Is the
interest rate fixed or variable?
- If the
rate is variable, under what conditions will it change?
- Is there
an interest-free grace period to pay my balance in full? If so, how
long?
- If I
don't pay my bill in full, how is the interest calculated? Do I
lose the grace period in the future?
- Is there
an annual fee? If so, how much?
- What
fees might I be charged for going over my credit limit or making a
late payment?
- What is
the interest rate for cash advances? Is there an additional fee?
When does interest begin accruing?
- Does the
card offer other benefits such as airline or hotel frequent
purchase programs, travel insurance, or special discounts/rebates?
- Does the
card use enhanced security features (such as a photo on the
front)?
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