How to Choose a Credit Card
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As the economy continues its slow recovery, credit card issuers are ready to start enticing consumers with the promise of great terms and easy money. The Federal Reserve and J.D. Power and Associates have both reported an increase in credit card spending for 2012.
With credit cards are becoming popular again and creditors loosening their standards a little bit, you are probably seeing more credit card offers in your mailbox. For best results, you need to be a little picky.
Before you sign up for a credit card, evaluate the offer to ensure that you are getting the best deal for you. Here are 10 things to do. (See also: 6 Awesome Credit Card Tricks That Will Save You Money)
1. Avoid Independent Marketers
You might be surprised to learn that some credit card offers come from independent marketers. These offers come in very plain envelopes that, rather than being branded with a bank’s logo or name, bear generic return addresses to “Credit Card Administration” or “Processing Center.”
These card offers are rarely your best choice. Many of them attempt to charge you for an application or come with other fees. Instead, choose from credit card offers straight from the issuer.
2. Choose a Rewards Program You Will Use
Many credit card issuers try to lure you in with the promise of a rewards program. Before you decide, make sure that you will use the rewards. Don’t get a miles card if you are more interested in cash back.
Also, pay attention to the terms of the rewards. Some cards advertise that you can get 5% cash back, but then you find out that you only receive that amount on certain categories, rotated throughout the year. Miles programs are notorious for making you feel as though you are receiving a lot, but then you find out that you need 40,000 miles in order to redeem your rewards for a flight.
Finally, make sure you understand redemption fees, blackout dates, and expiration policies. Also, some cards will zero out your rewards if your card is inactive for a certain period of time.
3. Evaluate the Annual Percentage Rate
Next, look at the annual percentage rate (APR). Consider the purchase and cash-advance APRs. Understand what you will be charged for each type of transaction. Your purchase APR is the rate you pay on regular purchases made with the card, and your cash advance APR is the rate paid for cash withdrawals at the ATM.
You should also pay attention to the default rate. This is the rate you are charged if you are late with a payment or go over your limit. Often the default rate is as high, or higher than, the cash advance rate — which is often much higher than the purchase rate.
When possible, choose a credit card with a lower interest rate. The purchase rate is often the most important charge to consider, but you should also be aware of the other rates you could be charged, especially if you plan to use your credit card to access cash.
4. Pay Attention to Introductory Periods
It’s easy to get drawn in by a 0% introductory rate. It seems like a good deal, since you can make purchases without having to worry about the interest charged. Make sure you understand how long the period lasts, though. Some credit cards only offer an intro period of 3 months, while others offer 18 or even 24 months.
Understand, too, that you might get an introductory period on a balance transfer, but not on a purchase. Or you might receive the low intro rate on your purchases, while paying interest on any balances you transfer. Sometimes there are different intro periods; you might receive 6 months on a balance transfer, and 12 months for purchases.
Look for a longer introductory period, but also make sure you understand what is covered in that intro period. Try to find a card that gives you an intro period on both balance transfers and purchases.
Also plan to pay of balances before the intro period ends. Otherwise you could end up paying the higher regular rate. Make sure you find out whether the interest is “capitalized” at the end. While most issuers don’t do this, some will add up all the interest you would have paid, and then add it at the end of the intro period if you still have a balance.
Finally, don’t forget that your intro period can end abruptly if you are late with a payment or go over your limit.
5. Watch Out for Balance Transfer Fees
Many credit cards come with balance transfer offers. It’s important to carefully evaluate balance transfer offers — especially if you are trying to reduce your debt faster. A balance transfer can help you put more money toward the principal of your debt rather than reducing your payment’s effectiveness with interest payments.
However, before you transfer a balance, make sure that you are ready to meet the terms. Most cards have a balance transfer fee of between 3% and 5%. So even though you might pay 0% interest for six months, you could still pay a hefty balance transfer fee.
Run the numbers and make sure that your interest savings during the intro period will more than offset your balance transfer fee. Even better, look for a credit card that doesn’t charge balance transfer fees.
6. Pay Attention to Balance Computation
It’s one of those fine-print things, but the way your balance is computed makes a big difference in how much interest you pay. If you pay off your balance each month, this isn’t such a big deal, but if you carry a balance, it does. There are two options:
Average Daily Balance
Each day, your credit card balance is figured. At the end of the billing cycle, all of it is averaged. Interest is charged on your average balance.
With this method, the issuer takes the balance at the end of the last period, and subtracts any payments that you have made during the current cycle. This is considered advantageous to consumers, since it gives you the chance to pay part of the balance without interest during the next billing cycle.
7. Understand How Often the Interest Is Compounded
Another small item to consider is how interest is calculated. Your credit card represents compound interest, meaning that when you are charged interest, it is added to your balance, and you pay interest on the total. Essentially, you pay interest on your interest.
Unfortunately, most credit cards compound interest daily. This means that at the end of each day, your interest is added to the balance. Because you are charged interest more often, the bill is slightly bigger by the end of the month.
There are some credit cards that compound interest monthly, but those are few and far between. It doesn’t hurt to check, though, since the difference can matter if you plan to carry a balance.
8. Consider the Annual Fee
Find out whether or not the card has an annual fee. In some cases, the card materials make a big deal of not having an annual fee, but when you look closer, you can see that there is an annual fee — it’s just waived for the first year.
You can also determine whether that annual fee is worth paying. In some cases, the rewards program and other perks are so generous that they more than make up for the annual fee. If you know that you will use the credit card enough to offset the fee, it might be worth it for the other perks and rewards.
9. Watch Out for the Minimum Finance Charge
Read the terms to find out whether or not your credit card comes with a minimum finance charge. This is the minimal amount you will have to pay each month — no matter how small your balance. If the minimum finance charge is $15 a month, and you happen to have just a small amount on the card, like $10, you might still have to pay the minimum finance charge.
If you have a large balance that you carry regularly, the minimum finance charge probably doesn’t matter. However, it can make a big difference if your balance is small, since you could be paying a little extra due to the minimum finance charge. If you do have a card with a minimum finance charge, you are better off keeping tabs on the balance, and paying it off in its entirety.
10. Look for Other Fees, Terms, and Conditions
Make sure that you look at other fees and conditions. One of the biggest items to pay attention to is the dispute resolution process. You might be subject to binding arbitration, meaning that rather than resolving the issue in court, you have to abide by the decision made by an independent third party.
Other conditions might include additional fees for various services, as well as qualifiers that indicate that you might not receive the advertised interest rate. Carefully read the fine print. Credit card issuers include information on the complete terms and conditions, and you can also usually find the information online.
Before you commit to apply for a credit card, double check the offer. Compare offers, and then choose the one that is likely to provide you with the greatest benefit.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.