Here are some tips to keep in mind when deciding on a credit card. While in the past finding answers to these questions was like decoding a cipher, recent legislation now requires companies to be much more up front than they would be otherwise. Even so, the language can be convoluted, so read the promotional material carefully.
Type of card:
If you plan on paying off the balance each month, then a charge card like American Express is best. If you need to purchase items now that you cannot afford to pay for in its entirety, a credit card would be the best option. And if you just want to transfer the balance of another credit source, get a card that offers a low interest rate on balance transfers.
Annual Percentage Rate:
The annual percentage rate is what banks charge you for borrowing their money and is expressed as a yearly rate. Companies are required to disclose this number and it must be on each statement you receive. Check if the rate is fixed (does not change without your notification) or variable (changes based on basic economic interest rates). Needless to say, fixed interest rates are almost always in your best interest.
The grace period is the amount of time you have to pay your balance in full before finance charges are added. This applies primarily only if you pay off your balance each month. The grace period begins when the issuer prepares your statement, not when you receive it in the mail. However, they are required to mail your statement 14 days before the due date. The grace period is often 25 days but may be shorter, and check your fine print for some companies can change the grace period at their discretion.
Using a credit card can result in costs beyond the item purchased and interest on the amount borrowed. The most common are application fees, late fees, annual fees, over-the-limit fees, balance transfer fees, cash advance fees and finance charges.
How Finance Charges are Calculated:
While interest rates and how finance charges are calculated vary from one company to the next, they are all required by law to disclose both. Look on the back of your statement for the explanation. The six ways they calculate finance charges are Adjusted Balance, Average Daily Balance, Daily Balance, Double Billing Cycle, Ending Balance, and Previous Balance. The Adjusted Daily Balance method benefits the consumer the most.
The credit limit is the amount you can charge to your account. Charge Cards like American Express generally do not have a limit. Credit Cards, on the other hand, have a specific amount and if you exceed it, you can be in for some hefty fees. Credit Card companies like to increase your limit from time to time, but be wary. This tends to simply make you feel richer and more liable to incur more debt.
Finding out about each of these elements can be a convoluted mess (often on purpose) to untangle. Credit card companies are required by law to inform you of each, but the print my be small or in language only a financial guru would understand. If you are unsure of any of these, call the company and ask then get a card tailored to your specific needs.