How to Choose a Credit Card

Faith Hinz

9-11-2009

You probably get offers in the mail every week for credit cards boasting high spending limits and low interest rates. Some of these offers are too good to be true, but there are solid credit cards out there if you know what to look for. Comparison shopping will help you find a credit card that fits your needs and doesn’t cost a fortune. To help you weigh the pros and cons and learn how to choose a credit card, this article covers the following topics:

Why you need a credit card
Different types of credit cards
Using your credit card
Comparing credit card rates and costs

Why you need a credit card

Credit cards often get a bad reputation. You may have heard stories about people who accumulate large credit card debt accompanied by high interest rates. However, the pitfalls of credit cards generally occur when the cards are used irresponsibly. In reality, credit cards are helpful tools that provide many benefits when used sensibly. Some advantages of carrying a credit card include the following:

Make online purchasing simple – Many online retailers require customers to pay by credit card. You also have the right to stop payment on a transaction and get your money back for an online credit card purchase that never arrives.
Improve your credit rating – One of the easiest ways to improve your credit rating is to consistently pay at least the minimum balance on your credit card every month.
Protect your assets – If your credit card gets stolen and used, the Fair Credit Billing Act limits your liability for unauthorized charges to $50 per card, something that isn’t guaranteed if you lose cash.
Have access to money – Credit cards give you access to money without having to carry around a large sum of cash. This can be especially helpful when you’re traveling or don’t have access to your debit card during an emergency.
Get rewarded – Some credit card companies offer their cardholders certain rewards like cash rebates, frequent-flier bonus miles, gift cards to well-known stores, or donations to a favorite charity.

Different types of credit cards

There are a variety of credit cards available to customers, each with pros and cons. First choose which type of card best meets your needs. Consider the following options:

Bank cards – These credit cards are issued by banks or credit unions and have the logo of a major credit card company, such as Visa or Mastercard. Bank cards are very diverse and a good option if you want a card you can use for purchases at nearly all locations.
Travel and entertainment cards – These types of credit cards are offered to you directly by companies like American Express and Diners Club rather than through a bank. American Express cardholders must pay their bill in full every month. Diner’s Club gives you two months to pay your balance without incurring charges. These types of cards often charge an annual fee to cardholders, and in exchange, members get extra bonuses and security features that aren’t available with other credit cards. Consider a travel or entertainment card if you know you’ll always pay your balance each month.
House credit cards – This type of credit card can only be used at a specific retailer like a department store or a gas station chain. These cards are often offered to you by sales associates at the point of purchase and give you the chance to accrue rewards in the store where you have the account. But the costs outweigh the benefits of this type of card. With annual purchase rates (APRs) upwards of 20 percent, it’s best to steer clear of house credit cards.
Secured credit cards – This type of credit card requires a cash deposit that becomes the credit line for your account. Sometimes this security deposit will be returned to you once you’ve proven to the company that you’ll pay your bill regularly. Consider a secured credit card if you are trying to establish or rebuild your credit.

Using your credit card

Each credit card comes with a unique set of terms, fees, and conditions. Selecting the most favorable terms for your situation can be more difficult than deciding among bank, travel, house, and secured card types. However, a thorough understanding of your credit behavior will help you navigate your card options. Ask yourself the following questions to help determine which card is right for you:

Will I carry a balance? If so, you’ll want a credit card with the lowest interest rate you can find. If you plan to pay your bill in full each month, look for a credit card that offers a longer grace period for those rare instances when you forget to make your payment on time. You can completely avoid paying interest if you never carry a balance or make payments beyond your grace period.
Do I often forget to pay my bills on time? It’s always best to pay your bill on time, every time. But if you tend to be forgetful, try to find a card with a low late-payment fee.
What will I use my card for? Most services cost something. Credit card companies typically offer different interest rates for purchases, balance transfers, and cash advances, so make sure you know the rate for each. Don’t forget to factor in the interest rates for the following services:
- New purchases – Charges you make on your credit card, like groceries or clothing.
- Balance transfers – Transferring part or all of your balance from one credit card to another, usually for the purpose of getting a lower annual percentage rate (APR) of interest. Make sure your credit card offers the best deal for balance transfers if you plan to move a balance from an old card to your new one.
- Cash advances – Borrowing money from your credit card company against your credit limit. Cash advances usually come with a hefty interest rate and no grace period and should be avoided if possible. If you plan to use cash advances, make sure your card charges a low interest rate for this service.

Comparing credit card rates and costs

Thanks to the Federal Truth in Lending Act (TILA), credit card companies have to provide certain information in any offer they make to you. You’ll find this information printed in what’s called the “Schumer box” on the back of the credit card offer letter. You can also compare credit card rates and offers online. Make sure you check out the following information about your offer before you complete the card application:

Credit limit – The maximum amount you can charge on any one credit account. If your credit score is high, credit card companies will usually offer you a higher credit limit. Having a high credit limit is good for your credit score, but don’t let a high limit tempt you to charge more than you can pay for.
Interest Rates – The amount you pay your credit card company for use of the money charged to your credit card each year. This figure is often referred to as the Annual Percentage Rate (APR) and is divided by 12 to calculate your monthly interest rate. Remember that credit card companies typically offer different interest rates for purchases, balance transfers, and cash advances. Also, be wary of introductory rates. Sometimes credit card companies offer low introductory interest rates, but then raise the rates dramatically after the introductory period expires. There are several types of interest rates:
Fixed Interest Rate – An interest rate that remains the same as long as you have a credit card. The interest on a fixed rate card can still change, but the credit card company must give you 15 days written notice if they change your interest rate. A fixed rate is often your best bet if you don’t want to worry about your interest rate changing frequently and without notification.
Variable Interest Rate – An interest rate that changes over time and is based on factors like the Federal Reserve discount rate and the prime rate. Credit card companies that use a variable interest rate can usually change your interest rate without notification.
Tiered Interest Rate – An interest scale in which higher balances are charged higher interest rates. For example, you may have a 10 percent interest rate for a balance of $499 but a 15 percent rate for a balance over $500.
Grace Period – The period between a purchase and the time interest starts accruing on that purchase. The grace period for many credit cards is 25 days, but make sure you double check to avoid paying interest. If you have a short grace period, you may have to pay your credit card bill before its due date to avoid interest charges.
Annual fee – The amount a credit card company charges you per year to carry their credit card. Opt for a credit card with no annual fee.
Late-payment charges –A fee your credit card company charges you for paying your bill late, usually in the range of $15 to $50 per month.
Over-limit fees – The fee your credit card company will charge you if your charges exceed your credit card limit. This kind of fee can be very costly if your balance remains over the limit.
Minimum payment – The amount your credit card company requires you to pay each month. It’s usually a percentage of your principle amount, from one to three percent, plus all fees and interest charges for the month. Find a card with a high minimum payment. The higher your minimum payment, the lower your debt will cost you in the long run.
Finance Charges – The fees you pay for using a credit card including interest and cash advance fees. Different credit card companies calculate finance charges differently; here are some popular methods:
- Average daily balance – Your outstanding balance is averaged for the billing cycle and you’re charged interest on that average. This is the most common way that credit card companies calculate your finance charge.
- Two cycle average daily balance – This method takes your current and preceding billing cycle into account when calculating your outstanding balance. This means you’re charged interest on debt you’ve already paid. This method is rare and should be avoided.
- Adjusted balance method – With this method, your finance charge is calculated by using the outstanding balance at the start of your billing cycle minus any payments or credits made during the cycle. This is typically the best method for cardholders.
- Previous balance method – Your finance charge is based on the outstanding balance at the beginning of your billing cycle. Avoid a credit card offer that calculates finance charges with this option as it’s usually the least desirable method.

There are many things to compare when choosing a credit card. To get the best deal, make sure you’re paying as little as possible in interest, fees, and any other costs. Carefully weigh the pros and cons of different credit cards, and you’ll surely find a good card that doesn’t break the bank.

By: Faith Hinz

9-11-2009

Faith Hinz is a freelance writer who has written for industries ranging from healthcare to automotive. She lives and works in Chicago. Follow her on Twitter at twitter.com/faithaubrey and on her blog at advertisinginthecity.wordpress.com.