Choosing a Credit Card
Like most people, your mailbox is probably full of pre-approved credit card offers. So, which one do you choose? Should you make a switch or keep the card you have? Before you begin to determine whether or not a credit card is right for you, you should answer the following questions.
- How much will you spend on the card each month?
- Do you plan to pay off the balance on the card each month?
- Do you plan to rollover the balance on the card each month, paying the minimum balance or another portion of the balance?
- Are you willing to pay an annual fee for the card?
- Do you have a good, strong credit history?
Once you have answered these questions, you should then begin to research your options, Take your time to compare the critical elements of a credit card to make the right choice. We have provided some valuable comparison elements for you to consider in this course. (NOTE: By law, all creditors MUST provide the following information to a consumer.)
Annual Percentage Rate (APR)
An APR is the percentage applied to the balance on your card. The higher the APR, the more interest you will pay on a balance you carry from month to month. Most credit cards have a different APR for purchases, balances transfers and cash advances. Be cautious to look for changes in the APR under certain conditions, especially if you get a lower rate for an introductory period. The APR can be fixed, variable or tiered.
The grace period is the amount of time you have to pay your balance in full before a finance charge is applied. In most instances, the grace period ranges from 20 to 28 days from the billing date. Longer grace periods are better because they allow you more time to avoid interest charges. If you already have a balance on the credit card, new purchases may not have a grace period.
Calculation of the Finance Charge
The method used to calculate the finance charge on a card has an impact on the amount of the charge. Some methods take only the current month’s balance into account, while others consider the current and previous months’ balances. Additionally, new purchases may or may not be considered in the calculation.
The most common methods for calculation are: the average daily balance method (with or without new purchases), the two-cycle average daily balance method (with or without new purchases), the adjusted balance method, and the previous balance method. The average daily balance method is the most common and least expensive for the consumer.
The credit limit, or the amount you can purchase on your card, may influence your purchasing power. In most instances, if you are new to credit, or trying recover from a credit problem, your credit limit will be low. As you become more familiar with credit, or show you can be responsible with a certain credit amount, you may be given a higher credit limit automatically or upon request. Be wary of no-limit cards as they may look maxed out on your credit report.
Because many credit cards may look alike, many card issuers attach special rewards to lure consumers to their cards. Some common rewards on cards include airline mileage or points, cash back bonuses, and purchasing points for consumer goods. In each instance, you should read through all of the material to review the terms and conditions of these offers.
Many credit experts recommend that you look at more than one card of interest and compare all of these items in a chart. Look for the card that you feel will suit you best. For example, if you plan to pay off your balance in full each month, you may not be as concerned with the rate, but may be enticed by the rewards the card may hold. If you plan to rollover your balance from month to month, the APR and the calculation method on the card will be critical in your decision. You may be adverse to being charged an annual fee, but would like to sign up for the reward programs associated with a certain card. You may want to have a fixed rate over a variable.
Whatever you desire, you must read all of the fine print in any credit card offer to be sure you are getting exactly what you desire. The worst thing that can happen is to find out about hidden costs and fees after the fact. Take the time now to do your homework, talk with an expert you trust, and pick the card that is right for you.