Shopping for the Right Credit Card

How will you use the credit card?

Now that you've decided to get a credit card, you should decide how you'll use the credit card. Will you:

  • Pay off the credit card balance each month or carry a balance
    Some cards have higher interest rates than other. If you carry a balance, that interest rate will apply. Some cards also have annual fees. Generally, a card with no annual fee is a wise choice.
  • Transfer a balance from other credit cards or loans
    Transferring balances between cards can be beneficial if the new card has a lower interest rate. Some cards also offer even lower interest rates than they normally charge if you transfer a balance from an existing card. Some cards may charge fees for the transferring the balance. They may also charge interest the day the balance transfer occurs.
  • Get cash advances
    Credit cards may allow you to obtain cash much like an ATM card. Be careful however, because cash advances can be subject to cash advance fees, and different and sometimes higher interest rates than when you use your credit card to buy an item. In addition, the interest and fees may be charged starting the day you get the cash.
  • Use the credit card outside of the United States
    Because credit cards are accepted outside of the United States, they can be handy to use when you travel. However, be aware that when you make a purchase in a foreign country, your credit card company may charge you a fee because your purchase occurred outside of the United States.
  • Accumulate rewards
    Many companies offer rewards for using credit cards. Common types of rewards include cash, discount certificates, and airline miles that can be redeemed for future flights or upgrades. Research your credit card to determine if the rewards that are offered would be valuable to you.

Deciding how you'll use the credit card will help you determine what credit card costs and terms are important to you. By figuring this out, you can shop for the right card.

Shop and compare

With those factors in mind, start shopping for a credit card. Don't go with the first credit card offer you see. To save money on fees and interest, shop around for the best credit card for you. Places to look for credit card offers include:

  • Banks
  • Credit Unions
  • Online websites for banks
  • Solicitations that are on TV, radio, newspapers, magazines, in the mail.
  • Stores, airlines, and other companies

When you look at the offers, take a close look and compare the disclosures for each offer. The federal Truth in Lending Act requires that each solicitation you receive and each application for a credit card contain certain disclosures. Each offer provides a boxed disclosure that tells you some of the costs and other terms for using the credit card. Below is an example of what this disclosure box will look like.

Annual percentage rate (APR) for purchases 2.9% until 1/11/00, after that, 14.9%
Other APRs

Cash advance APR: 15.9%

Balance transfer APR: 15.9%
Penalty rate: 23.9%. See explanation below.*
Variable-rate information Your APR for purchase transactions may vary. The rate is determined monthly by adding 5.9% to the Prime Rate.**
Grace period for repayment of balances for purchases 25 days on average.
Method of computing the balance for purchases Average daily balance (excluding new purchases)
Annual fees None
Minimum finance charge $.50
Transaction fee for cash advances: 3% of the amount advanced.
Balance transfer fee: 3% of the amount transferred.
Late-payment fee: $25
Over-the-credit-limit fee: $25
* Explanation of penalty.
** The Prime Rate used to determine your APR is the rate published in       on the     day of the prior month.

Deciphering the Credit Card Disclosures

APR APR is the abbreviation for the Annual Percentage Rate. The APR is the interest rate that applies when you use your card and carry a balance past the grace period. This is expressed as a yearly rate. A credit card can have many different applicable APRs depending how the card is used.

There may be an introductory APR that will end by a certain date. This is sometimes called a "teaser" rate. It is often lower than the normal APR which will apply to your unpaid balance after the introductory rate ends. After that date, a different, often higher APR may apply. Make sure you are aware of each APR and the date the higher APR begins to apply.

Your card may have one APR for purchases, a different APR for when you use your card to obtain cash advances, and another APR for when you transfer balances from another card. If you've determined that you want to use the card to transfer balances or primarily obtain cash advances, you should make sure you are aware of the APRs for those activities. In other words, make sure you understand and are comfortable with the APR that applies to the activity you plan on primarily using the card for.

The balance amount may also determine the applicable APR. One APR may apply to balances under a certain amount and another may apply to balances over a certain amount. If your card applies APRs in this way, make sure you monitor your balances to avoid higher APRs.

Finally, your card may have a default or penalty APR. This is a higher APR that may apply if you are late in making a payment, if you don't make a payment at all, or if you otherwise don't comply with the terms of the credit card agreement. The application of the penalty rate may be a permanent change or it may be a temporary change for a certain period as long as you meet the terms of the agreement going forward.

Some APRs are variable and some are fixed. A variable APR is one that is linked to a publicly available interest rate, such as one published by the Wall Street Journal. A variable rate is often a fixed rate added to the publicly available rate. So, as that publicly available interest rate goes up or down, so does the variable APR. A fixed APR is one that is not linked to a publicly available interest rate. It may change if the credit card company notifies you of the change. But it usually doesn't change as often as the variable APR.

Fees In addition to charging you interest, the credit card may also charge you various types offees. You may be charged fees for:

  • Opening the credit card account
  • Annual or other type of membership fee
  • Balance transfer
  • Cash advance
  • Foreign transactions (using the credit card outside of the US).
  • Late fee.
  • Over-the-Limit fee.
  • Return payment fee (when your payment check bounces).
Grace Period The grace period may be an important feature if you plan on paying off your balance every month. The grace period is the period of time before a finance charge is applied to your unpaid balance. Different cards may have different grace periods. The longer the grace period the longer you have to pay back the balance without being charged interest. The grace period usually only applies to new purchases and not balance transfers or cash advances. This means that interest starts to accrue on balance transfers and card advances immediately. Some cards may not provide a grace period for new purchases if you carry an unpaid balance. For example, if you carry a balance from month 1 into month 2 and then make a new purchase in month 2, the grace period would not apply to the new purchase you made in month 2. Be sure to look at the disclosures carefully so you understand how the grace period for the card operates.

Finance Charge The finance charge is the amount you pay to use the money provided through your credit card. It includes fees, such as cash advance fee, and interest accrued on the outstanding balance.

Credit card companies may use a number of different methods to calculate the finance charge. A common method is the average daily balance method. Other methods include the adjusted balance method, the previous balance method, and the ending balance method. Your credit card disclosures and agreement will explain to you the method by which the company calculates the finance charge for your card. If you don't understand, contact the credit card company and ask that they explain it to you.

Penalties Take a look at the penalties that may apply to your card. What behavior will trigger the penalty? For example, a penalty may be triggered if you go over the credit limit or if you pay late. If a penalty is triggered, look to see what happens. It could be a fee or an increase in the APR to the penalty rate or both. If the APR increases, how high will it increase? What fees will be charged? Will anything else happen? If the penalty is triggered and the APR is increased, is there a way to bring it back down? For example, the disclosure might tell you that paying on time for 12 months will bring the APR back down. Also be aware if there is a universal default provision. This type of provision can impose penalties if you are late or otherwise default on other credit obligations that you may have, not including this credit card with the universal default provision. In other words, if you are late paying a monthly payment on a loan, the credit card company with the universal default provision may increase your interest rate. You should try to avoid this type of provision.

Credit Limit Your credit limit may also be important to you. This will not be included in the disclosure box because it is determined after you apply for the card. The credit limit is the maximum amount of money available to you for your use. Some credit cards may have different credit limits such as a credit limit for purchases and a different credit limit for cash advances. Be aware of your credit limit as you use your card. If you go over the limit, you may be charged a fee. The credit limit provided to you will be based primarily on your creditworthiness and your credit score. The higher your credit score the higher your credit limit will be.

Rewards Programs Another important aspect of your credit card may be the rewards program that the specific card offers. Rewards can be things like airline miles, cash back, discounts with certain merchants, or other lucrative items. The details of the rewards program will not be provided in the disclosure box but rather in a separate brochure or agreement. You should look for this agreement or brochure and read it carefully. If the rewards program is an important aspect to choosing your credit card, make sure you investigate the terms and conditions of the program thoroughly so that the one you choose meets your needs.