Things to check when looking for credit card
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Whenever you’re looking for or have a standard card, a gold card, a rebate card, or a secured card, scrutinize the following:
- The annual percentage rate. The annual percentage rate (APR) is the total cost of credit expressed on an annual basis. You can find a credit card’s APR on an application or its monthly billing statement. Most credit cards today have variable interest rates, usually pegged to 10 percentage points or so above the prime rate (the rate banks charge their best customers). Be careful: many cards that advertise rock-bottom, single-digit APRs have rates designed to last for only a few months before they soar by as mush as 10 points. If you wind up taking one of these “deals”, cancel your card before the initial rate expires.
- Variable-rate cards sometimes masquerade as cost savers, since they support to charge APRs that rise and fall with interest rates. But some of these cards sport a minimum interest rate that’s actually a maximum rip-off. For instance, one bank recently offered a secured MasterCard rate of prime plus 10.5%. That might sound as though it amounts to roughly 18%. But the fine print says that the bank has a minimum rate of 18.9%, which is what cardholders actually pay unless the prime rate is 8.4% or higher.
- The annual fee. Many bank card issuers charge an annual fee of $20 to $35 for standard cards and from $50 to $100 for premium or gold cards. Here’s a secret: if you have a decent credit rating, you might be able to get this fee waived. When it shows up on your bill, call your card’s issuer and, as politely yet fervently as you can, demand that the issuer stop assessing the fee. The issuer may waive it to keep your business. You may even be able to get American Express card to do the same, especially if you threaten to cancel.
- The grace period. A card’s grace period lets you avoid its finance charge if you pay the balance in full before the due date. Usually the due date is about two weeks after you have received your monthly statement. Most cards offer a grace period that annoyingly vanishes whenever you carry a balance. So, if you charged your kids’ fall wardrobes last month, for instance, but didn’t pay the entire balance at the end of the month, you’ll start accruing finance charges on whatever you buy today almost as soon as you leave the store.
- American Express decided to capitalize on the grace period shell game in 1994, when it launched its True Grace card. The no-fee, low-interest rate card comes with a rate perk: a 25-day interest-free period on all your charges, whether you carry a balance or not. But a closer inspection of True Grace reveals that this card comes with several hidden costs. For one thing, although its interest rate starts at a low 7.9%, after six months the rate leaps to the prime rate plus a hefty 8.75 percentage points –that could easily land you a rate of 18% or so. Second, if you make three payments more than 30 days late, you’ll pay prime plus 12.9 points –which could easily approach 22%. And although True Grace comes with no annual fee for the first year, you’ll pay $25 thereafter if you don’t use the card at least three times a year. Then there’s this: like its AmEx siblings –the green, gold, and platinum cards –True Grace is accepted at only about a third of the number of merchants that accept Visa and MasterCard. So if you tend to carry a balance on your cards, you’d be better off sticking with a bank credit card with a rock-bottom rate. If you’re worried that you’ll happen to go to some hoity-toity restaurant that takes AmEx but not Visa or MasterCard, however, True Grace may be your ticket.
- The junk fees. Most card issuers charge you a fee when you make a late payment (average fee: $12.50), exceed your credit limit (average: $12.75), or take out a cash advance (usually a fee of 2% to 4%). Watch out for cards that spare you an annual fee, then sock it to you with other steep charges.
- The minimum payment. In recent years, three of the top ten credit-card issuers –Citibank, MBNA, and Chase –lowered their required minimum monthly balance from 2.8% or 2.5% of your monthly balance to around 2%. But if, like the average cardholder, you carry a balance of $1,100, paying off just 2% a month instead of 2.8% will add $120 to $400 to your annual interest bill. Unless you’re strapped, reject this new offer. If possible, send in a payment that’s at least double what your issuer requires.
- The balance-computation method. Here’s a riddle: When is 18% not 18%? The answer: When two credit-card issuers calculate their interest rates differently. There are basically four ways card issuers can compute a balance: (1) the average daily balance (excluding new purchases) method, in which the issuer totals the balances for each day in the billing period without counting your new purchases; (2) the average daily balance (including new purchases) method, in which an issuer figures your average balance after counting your most recent purchases; (3) the two-cycle average daily balance (excluding new purchase) method, which totals your average balances for two billing cycles not including new purchases; and (4) the two-cycle average daily balance (including new purchases) method, figured the same way after taking your recent purchases into account.
If you occasionally carry a balance, you’ll usually pay the least amount of interest when an issuer uses the average daily balance (excluding new purchases) method. Consider this example from BankCard Holders of America: Suppose that four times a year you charged $1,000 on a credit card with a 19.8% interest rate and made the minimum payment of $28 when the charges appeared on your bill. The following month you charged another $1,000 and paid off the entire balance when your next bill arrived. The interest you owe over a year could vary by as much as $70.
TYPE OF BALANCE INTEREST
Average daily balance $66
( excluding new purchases )
Average daily balance $132
( including new purchases )
Two-cycle average daily balance $131
( excluding new purchases )
Two-cycle average daily balance $196
( including new purchases )
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6 Responses to “Things to check when looking for credit card”
Excellent breakdown of what to look for in a credit card. What about including Rewards or points you can earn to get cash back or gift cards? My wife and I have two credit cards that both earn us rewards and cash back. We pay off the bill every month and keep a very detailed account of what we spend. So when I look for a credit card, I really only look at the Annual Fee and won’t sign up for it if there is one.
By
pfincome (Who am I?) on Jan 5, 2009
Great breakdown of what to look for. Do you recommend looking at one item over the other?
By
Craig (Who am I?) on Jan 5, 2009