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 Credit Card Accountability and Disclosure Act of 2009 (the Credit CARD Act) recently amended TILA and other statutes, requiring even more disclosures and restricting certain interest rate hikes and fees. Most of the changes go into effect on February 22, 2010. (To learn more about this new law, see Nolo's article The Credit Card Act: More Protection for Cardholders.)
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"). If conspicuously disclosed, credit card issuers can increase teaser rates after six months.
- 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.
- Starting February 22, 2010, card issuers cannot raise your interest rate for the first year after you open the account. But some exceptions apply -- read the fine print.
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. The new Credit CARD Act bans double-cycle billing -- when the credit card company calculates interest charges on the current balance by factoring in the average daily balance from the previous billing cycle, even if a portion of that previous balance was paid.
Annual fees. Some credit card companies charge you a flat fee (in addition to interest and other charges) for using their card. Some do not. If you pay off your balance each month, you want a card without an annual fee. If you carry a balance, a card with an annual fee but a low interest rate may be less expensive than a card with no annual fee but a high interest rate.
Transaction fees. The company must disclose any fee that is imposed for using the card to make purchases, balance transfers, or cash advances.
Other fees. Most credit card companies charge penalties for late payments or going over your credit limit. However, as of February 22, 2010, in order to charge over-the-limit fees, the card issuer must get you to "opt in." This means you agree to allow the card company to authorize transactions that will put your account over the limit, and then charge fees. If you don't want to go over the limit, don't opt in to this provision.
Higher interest rates for cash advances and late payments. Virtually all credit cards charge higher interest rates for cash advances. And, with some cards, if you make late payments, the company imposes a new, much higher interest rate. If you think you might pay late once in a while (be realistic), check out these interest rates. Some exceed 20%.
Higher rates for defaults on other obligations. Many credit card companies today will charge you a higher interest rate if you default on an obligation to another creditor. Many companies review their customers' credit reports regularly to identify risky cardholders. If this review makes the company feel insecure, it may raise your interest rate even though you have been a model customer.
Prior to February 22, 2010, credit card companies could change the terms of your agreement with as little as 15 days' notice. After February 22, 2010, card issuers must provide at least 45-day advance notice of interest rate hikes or account term changes. (And interest rate hikes are restricted in some circumstances, as discussed above.)
If you do not like the changed rate or terms, you may close your account before the new terms become effective and then pay off the outstanding balance under the "old" rate and terms. The card company cannot require you to pay off the balance immediately or charge you the new rate.
Good Credit Card Deals
There are thousands of banks, credit unions, and other organizations that offer credit cards. And as of February 22, 2010, credit card companies will be required to post standard credit card contracts online -- so you can compare details of rates and terms between issuers. Here are a few ideas on where to start your shopping:
- Your credit union. Credit unions often have the best rates.
- The Internet. Use the Internet to do comparison shopping. Many banks advertise credit cards on the Web. And some websites provide credit card comparisons. Try www.bankrate.com, www.cardtrack.com, www.consumer-action.org, or www.federalreserve.gov/pubs/shop.
- Professional organizations and universities. Many professional organizations and universities offer credit cards with low interest rates and no annual fees to members or alumni.
For more information on finances, debts, and how to regain financial health, read Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard with attorney Margaret Reiter (Nolo).