(The MMI Online Articles are designed to inform, assist, educate and alert consumers)
When choosing a credit card think about how you'll use it. You may want to compare some of the features of various credit cards to see which one will suit your financial needs. Remember, when you agree to the terms of a credit card, you are entering into a legally-binding document. Following are some things to consider when choosing a card:
Annual percentage rate. The APR measures the cost of credit on an annual basis and may be the easiest way to compare costs among credit cards. Usually, the lower the APR, the less you'll be charged for credit. The APR includes the interest rate and other costs, such as service charges or loan fees. If you expect to pay back less than the full amount you charge each month, you’ll have to pay finance charges on the unpaid balance. In this case, choose a card with a low APR.
Annual fees. Many companies charge an annual fee, no matter how much or little you use your card. If you intend to pay your credit card bills in full each month, you won't have to pay monthly finance charges, so a card with a low or no annual fee will be more important to you than one with a low APR.
Grace period. A grace period allows you to avoid finance charges if you pay your bill before its due date. Some cards have no grace period and begin to impose finance charges the day you charge an item. Other cards offer grace periods from 21 to 30 days. Cards with longer grace periods will save you money if you pay all of your charges each month.
Method for computing the balance. Because finance charges are based on your balance, it is important to know how your balance is calculated. According to Bankrate.com, the most common type of finance charge is the average daily balance. To calculate your average daily balance, the creditor adds each daily balance together and then divides by the number of days in the month. Some issuers include new purchases in their calculations; others do not. While most creditors calculate your balance based on one month’s average daily balance others base your charges on the average daily balance for two billing cycles.
Other possible methods include the previous balance method (based on the amount owed at the end of the previous billing cycle) and the adjusted balance method (where they subtract payments before calculating the finance charge).
Transaction Fees. Many cards assess fees when you use your card in certain ways. For example, transaction fees are common for cash advances and wire transfers. Some cards also charge fees for purchasing theater tickets over the phone, buying lottery tickets, or charging casino gaming chips.
Late fees. If you make a late or partial payment, most, (if not all) creditors will charge you a fee. Fees often range depending on your balance; the higher the balance, the higher the fee. According to a Consumer Action survey, late fees for credit cards increased by 7 percent in 2002. The average late fee in 2002 was $27.82. Since fees are so high, consider setting up automatic bill payments to help you to avoid making late payments.
Over-the-limit fees. It pays to pay attention to your balance—fees for charging over your limit typically range from $15 to $40. If you must charge past your current limit, call your credit card company and ask them to raise your limit. Just remember that an increased limit is not a license to spend.
Finally, remember that not everyone qualifies for every card; this is true even in you receive a “pre-approved” offer in the mail. Pre-approved offers are still contingent on you meeting the creditor’s qualifications.
When choosing a credit card think about how you'll use it. You may want to compare some of the features of various credit cards to see which one will suit your financial needs. Remember, when you agree to the terms of a credit card, you are entering into a legally-binding document. Following are some things to consider when choosing a card:
Annual percentage rate. The APR measures the cost of credit on an annual basis and may be the easiest way to compare costs among credit cards. Usually, the lower the APR, the less you'll be charged for credit. The APR includes the interest rate and other costs, such as service charges or loan fees. If you expect to pay back less than the full amount you charge each month, you’ll have to pay finance charges on the unpaid balance. In this case, choose a card with a low APR.
Annual fees. Many companies charge an annual fee, no matter how much or little you use your card. If you intend to pay your credit card bills in full each month, you won't have to pay monthly finance charges, so a card with a low or no annual fee will be more important to you than one with a low APR.
Grace period. A grace period allows you to avoid finance charges if you pay your bill before its due date. Some cards have no grace period and begin to impose finance charges the day you charge an item. Other cards offer grace periods from 21 to 30 days. Cards with longer grace periods will save you money if you pay all of your charges each month.
Method for computing the balance. Because finance charges are based on your balance, it is important to know how your balance is calculated. According to Bankrate.com, the most common type of finance charge is the average daily balance. To calculate your average daily balance, the creditor adds each daily balance together and then divides by the number of days in the month. Some issuers include new purchases in their calculations; others do not. While most creditors calculate your balance based on one month’s average daily balance others base your charges on the average daily balance for two billing cycles.
Other possible methods include the previous balance method (based on the amount owed at the end of the previous billing cycle) and the adjusted balance method (where they subtract payments before calculating the finance charge).
Transaction Fees. Many cards assess fees when you use your card in certain ways. For example, transaction fees are common for cash advances and wire transfers. Some cards also charge fees for purchasing theater tickets over the phone, buying lottery tickets, or charging casino gaming chips.
Late fees. If you make a late or partial payment, most, (if not all) creditors will charge you a fee. Fees often range depending on your balance; the higher the balance, the higher the fee. According to a Consumer Action survey, late fees for credit cards increased by 7 percent in 2002. The average late fee in 2002 was $27.82. Since fees are so high, consider setting up automatic bill payments to help you to avoid making late payments.
Over-the-limit fees. It pays to pay attention to your balance—fees for charging over your limit typically range from $15 to $40. If you must charge past your current limit, call your credit card company and ask them to raise your limit. Just remember that an increased limit is not a license to spend.
Finally, remember that not everyone qualifies for every card; this is true even in you receive a “pre-approved” offer in the mail. Pre-approved offers are still contingent on you meeting the creditor’s qualifications.
