Smart consumers
comparison shop for credit, whether they're looking for a mortgage,
an auto loan, or a credit card. When you're looking for a credit
card, be sure to consider the costs and terms. They can make a
difference in how much you pay for the privilege of borrowing.
We're fans of the following cards:
- American
Express: AMEX is the card that Debtworking uses. In
our opinion, it's the gold standard of credit-card companies.
Better yet, they can approve you in 60 seconds on the Web for
personal cards (Blue
Cash-Back
 ,
Hilton
Honors Platinum ,
and the Amex
Rewards Green )
and business cards (Business
Gold ,
Platinum
Business ,
and Blue for Business Card )..
- Discover®:
Several cards to choose from (Platinum
 ,
Titanium ,
and Student )
and even some cards with
dogs,
wildlife and sports
teams ,
if you're into that sort of thing.
- WorldPerks®
Visa®: A good partnership program that earns you
airline points and other rewards every time you use the card.
Key costs
and terms to consider are the annual percentage rate (APR) for
goods and services as well as for cash advances, the annual fee,
and the grace period. Also compare cash-advance fees, late-payment
charges, and over-the-limit fees.
Besides looking
at these costs and terms, think about your typical bill-paying
behavior. Do you pay your outstanding balance in full each month?
Or do you usually carry over a balance? Matching the credit card
plan to your needs could save money.
Credit
Card Interest Rates
Credit card
issuers offer variable-rate, fixed-rate, and tiered-rate plans.
For variable-rate credit card plans, the interest rate is calculated
according to a formula. Some of the most commonly used formulas
are the prime rate; the one-, three- and six-month Treasury bill
rates; the federal funds rate; and the Federal Reserve discount
rate. Most of the indexes are published in the money or business
section of major newspapers. If the index rate used for your credit
card changes, the rate on your card will, too.
The margin is a number of percentage points chosen by the credit
card issuer. The card issuer also chooses the multiple.
The interest
rate on a fixed-rate credit card plan, though not explicitly tied
to changes in another interest rate, also can change over time.
The card issuer must notify you before the "fixed" interest
rate is changed.
A tiered interest
rate means that different rates apply to different levels of the
outstanding balance (for example, 16% on balances of $1 - $500;
17% on balances above $500).
Some card
issuers may have a policy that raises your interest rate if you
make late payments. For example, if you make 2 late payments within
6 months, the card issuer may raise your interest rate from 18%
APR to 24% APR. If such a penalty rate applies to your card, the
issuer must include a notice in the solicitation materials.
Card issuers
may also charge different rates for different types of transactions.
For example, the card may carry one rate for purchases of goods
and services, another rate for cash advances, and still another
rate for balance transfers.
How Much Will
You Pay?
The finance
charge--that is, the dollar amount you will pay to use credit--depends
on your outstanding balance and the periodic rate in your credit
card plan:
What Is the Outstanding Balance?
The outstanding balance can be calculated in several ways, and
the method of calculation can make a big difference in the finance
charge you will pay:
Average daily
balance method including new purchases. The balance is the sum
of the outstanding balances for every day in the billing cycle
(including new purchases and deducting payments and credits) divided
by the number of days in the billing cycle.
Average daily balance method excluding new purchases. The balance
is the sum of the outstanding balances for every day in the billing
cycle (excluding new purchases and deducting payments and credits)
divided by the number of days in the billing cycle.
Two-cycle average daily balance method including new purchases.
The balance is the sum of the average daily balances for two consecutive
billing cycles. One daily balance, that for the current billing
cycle, is calculated by summing the outstanding balances for every
day in the billing cycle (including new purchases and deducting
payments and credits) and dividing that total by the number of
days in the billing cycle. The other daily balance is that from
the preceding billing cycle.
Two-cycle average daily balance method excluding new purchases.
The balance is the sum of the average daily balances for two consecutive
billing cycles. One daily balance, that for the current billing
cycle, is calculated by summing the outstanding balances for every
day in the billing cycle (excluding new purchases and deducting
payments and credits) and dividing that total by the number of
days in the billing cycle. The other daily balance is that from
the preceding billing cycle.
Adjusted balance method. The balance is the outstanding balance
at the beginning of the billing cycle minus payments and credits
made during the billing cycle.
Previous balance method. The balance is the outstanding balance
at the beginning of the billing cycle.
Depending on the balance you carry and the timing of your purchases
and payments, the average daily balance method excluding new purchases,
the adjusted balance method, and the previous balance method tend
to result in lower finance charges than the other balance-calculation
methods.
What Is the Periodic Rate?
The periodic rate is the rate you are charged each billing period.
Usually the periodic rate is the monthly interest rate, calculated
by dividing the card's APR by 12. If your card has different rates
for different types of transactions, then different periodic rates
will apply to those balances. For example, if your card has a
12% APR on purchases, the periodic rate for purchases is 1%; and
if your card has a 24% APR on cash advances, the periodic rate
for cash advances is 2%.
The
Right Card for You
While
the outstanding balance and the periodic rate are important factors
in choosing a credit card, they shouldn't be your only considerations.
Other plan features may be more important to you, depending on
how you use the card. For example, if you don't always pay your
monthly bill in full, you'll probably be more interested in a
card that carries a lower APR. On the other hand, if you always
pay your monthly bill in full and card enhancements such as frequent
flyer miles don't interest you, your best choice may be a card
that has no annual fee and offers a longer grace period.
The grace
period is the number of days between the statement date and the
due date during which you can pay your bill without incurring
a finance charge. The card issuer may refer to the beginning or
ending point of the grace period and tell you about any conditions
that apply. For example, the issuer may say you have "25
days from the statement date, provided you have paid your previous
balance in full by the due date." Keep in mind that the statement
date is not the date on which you receive the bill; it is the
date on which the issuer prepares the statement, which may be
a week or two before you actually receive the bill in the mail.
Here are some
tips for shopping for a credit card. Certain
key pieces of information must be included in all solicitations
or applications for credit cards.
APR
for purchases
The interest rate you will pay, on an annual basis, if you carry
over balances on purchases from one billing cycle to the next.
If the card has a temporary introductory rate, the rate that applies
after the temporary rate expires is also stated.
Other APRs
The interest rates you will pay, on an annual basis, if you get
a cash advance on your credit card, if you transfer a balance
from another credit card, or if the card issuer applies penalty
rates. (More information on the penalty rate may be included outside
the disclosure box--for example, in a footnote.)
Variable-rate
information
If the card has a variable rate instead of a fixed rate, this
section will tell you how the variable rate is determined. (More
information may be included outside the disclosure box--for example,
in a footnote.)
Grace
period for repayment of balances for purchases
The number of days you have to pay your bill in full without triggering
any finance charges. With most plans, the grace period applies
only to purchases; cash advances and balance transfers may start
accruing interest immediately.
Method
of computing the balance for purchases
The method that will be used to calculate your outstanding
balance if you carry over a balance and will pay a finance charge.
Annual
fees
The annual fee (or other periodic fee) the issuer charges
for you to have the card. You may have to pay this fee even if
you never use the card.
Minimum
finance charge
Any minimum or fixed finance charge that could be imposed
during a billing cycle. A minimum finance charge usually applies
only when a finance charge is imposed, that is, when you carry
over a balance.
Transaction
fee for cash advances
Any charge imposed when you use the card for a cash advance.
If the card charges transaction fees for purchases, these fees
will also be stated here.
Balance-transfer
fee
A fee for transferring balances from another card to
this card, if any.
Late-payment
fee
The fee imposed if your payment is late, if any.
Over-the-credit-limit
fee
The fee imposed if your charges exceed the credit limit
set for your card, if any.
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