How do I choose a credit card?
Credit cards come with a wide variety of “terms and conditions” and wading through the options to find the best one for you can be confusing. A few characteristics of credit cards you’ll want to consider are its:
Annual Percentage Rate, or APR. The APR is a measure of the cost of credit as a yearly rate. The “periodic rate” is calculated from this and is the interest charged to your outstanding balance at the end of each month. Card issuers may charge a fixed APR, or change it as bank interest rates or other economic indicators – called indexes – change. The higher the APR, the more you’ll pay in interest charges.
Free Period. This is also known as a “grace period”, during which time you may have finance charges and interest waived. While this may be very attractive in the first few months, make sure the terms and conditions after the grace period are what you want in a card. Also, the grace period may suddenly stop if you make a payment late, go over your limit, etc.
Annual Fee. Depending on the card and the issuer, you may have an annual fee incurred for your card. Most fees range from $25 to $50 and up for “gold” or “platinum” cards. While more and more cards have no annual fee, expect any card with “rewards” (frequent
flier miles, cash back, etc.) to have some sort of charge. Make sure that the rewards you’ll get are worth the yearly charge for the card.
Transaction fees and other charges. A card may include other costs for things such as cash advances, late payments, or exceeding your credit limit. Some may also charge a monthly fee regardless of whether or not you use your card. Figure out what you’ll be using your card for and factor in the appropriate fees. For instance, if you never intend to use your card for cash advances, the fee incurred for this service should be weighed less heavily than the APR when choosing a card.
Balance Computation Method for the Finance Charge. How creditors calculate your balance and subsequent finance charge varies widely. The average daily balance is the most popular method, where the issuer totals the balance on your card from each day and divides it by the number of days in the billing cycle. See the Federal Trade Commission for information on other methods of computation.
To determine which card is best for you, think about how you plan to use it. If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the APR and periodic rate. It’s a good idea to make a chart that lists the credit cards you’re considering and their applicable charges.