Shopping for Credit Cards
Shop for a credit card by reviewing the key credit terms in each offer. Here's how.
If you are in the market for a credit card, you can save yourself lots of money by shopping around. Before you sign up for a new card, make sure you understand that card's important credit terms. Then shop for the card with the features that best fit your needs.
Important Credit Card Terms
The federal Truth in Lending Act (15 U.S.C. § 1637) requires credit card companies to disclose the key terms of the credit card in the application or solicitation.
The interest rate is a good start for comparison shopping. But don't ignore other terms -- they can cost you hundreds or thousands of dollars as well, depending on how you use your card. Here are the basic credit terms that must be disclosed and what you should look for in each one:
Annual percentage rate. Credit card companies must disclose the interest rate as an annual percentage rate (APR). The APR is the cost of credit, expressed as a yearly rate, such as 7.99%.
Because federal law requires that the APR be calculated in a standard way, it allows you to compare the cost of credit among different credit card companies using a single yardstick. The APR is the best indicator of the actual interest you will pay. If different APRs apply (for example, to balance transfers or cash advances), the bank must disclose those as well.
Here are some guidelines for APRs:
- If you never carry a balance on your credit card, then the APR is not important. You won't ever pay interest.
- If you don't pay your bill in full each month, the APR is crucial. The lower the APR, the better.
- Watch out for "introductory rates" (also called a "teaser rates"). After a few months, the interest rate will go up.
- Make sure the advertised rate applies to you. Sometimes it only applies to certain people, such as those earning a high income. Those who don't qualify get a higher rate.
Variable rate information. Some APRs vary monthly based on a benchmark such as the prime rate. The application or solicitation must disclose that the rate may vary and state how the rate is determined.
Grace period. This is the interest-free period of time between the purchase date and the bill due date. It is usually available only to those who do not carry a balance. If you pay your bill in full each month, make sure you have a grace period -- some companies no longer offer them. If there is no grace period, you'll pay interest from the date of your purchase. If you carry a balance, a grace period is less important.
Method of computing balance for purchases. Credit card companies use different methods to calculate the balance on which the finance charge will be based. One method is the "average daily balance" -- the balance is calculated by adding the outstanding balance (including new purchases) for each day in the billing cycle, and then dividing by the number of days in the billing cycle.
|
