Articles: Business-to-Consumer
Consumer-Advice Articles - Personal Finance
How to Choose the Best Credit Card for
You
Understanding the rates, fees and other terms and conditions
– and
balancing those against how you use your card – will allow
you to choose
the best card for you
By Jeff Trachtman, Vice President, Fifth Third Bank
A big credit card company’s recent
television ad campaign ends every ad with the question: What’s
in your wallet? Here’s what’s in the wallets of the average American
household, according to CardWeb.com: Six bank credit cards, with
an average balance per household of $8,562. The current average
credit card interest rate is nearly 14 percent.
Considering the sheer number of credit card issuers and products
– approximately 5,500 institutions issue about 40,000 different
Visa and MasterCard credit card products in the United States
– those household numbers are not surprising.
But don’t be overwhelmed by the dizzying array of credit card
choices. Understanding the rates, fees, grace periods and other
terms and conditions – and balancing those against how you use
your credit card – will allow you to choose the best credit card
for you. If you already have one or more cards, becoming more
credit card savvy will help you decide if you can find a better
card than what’s in your wallet.
How Do You Use Your Card?
Finding the credit card to best meet your needs depends largely
on how you use your card, and whether you want to accrue “rewards”
for your card use. You should begin the process by answering
a few questions about how you use your card:
1. Do you, or will you, regularly carry a balance on your card? You
should be honest in answering this question. We all have the
best of intentions when it comes to paying off our credit card
balances each month, but about 60 percent of active credit card
accounts carry a balance, or revolve, from month to month.
If you are a “revolver” who regularly carries a balance on your
credit card, you should look for a card with the lowest possible
interest rate – even if you have to pay an annual fee. Lowering
your annual percentage rate (APR) even just a few points can
cut your costs dramatically.
For example, annual interest on the average household balance
of $8,562, at the average national interest rate of 14 percent,
is almost $1,199. Annual interest on that same $8,562 balance
at an interest rate of 10 percent is just over $856. That’s nearly
a $350 difference.
2. Do you, or will you, pay off your balance every month? Again,
be honest. If you do faithfully pay off your balance each month,
then you are better off with a no-annual-fee card. A card’s interest
rate is not the most important factor for you, because if you
pay off your balance on time and in full each month, you will
not incur an interest charge.
3. If you use your card a lot, do you want to accrue cash or merchandise
rewards, airline miles, etc? Rewards programs are
now widely available and span the spectrum from airline miles
to savings on new car purchases to merchandise or gift certificates
to cash back. Because they are becoming much more commonplace,
you can now find a rewards program that dovetails nicely with
your payment style. You should also keep in mind that most
rewards programs charge a fee to participate.
4. Do you need a specialty card, such as a small-business
credit card or a secured card? Many, but not all,
issuers offer credit cards especially for small businesses.
Some small-business credit cards today even allow participation
in rewards programs. Fewer issuers offer such specialty cards
as student or secured credit cards. Secured cards are designed
to help someone with impaired credit regain their credit standing;
they require a deposit in the amount of the credit line to
“secure” the card.
Even if you’re seeking a specialty card, you still must consider
whether you will revolve your balance, pay in full each month,
and if you want to participate in a rewards program (typically,
rewards programs are not be available to student or secured cardholders).
Understanding Rates, Fees, Terms & Conditions
To be a savvy credit cardholder, you have
to understand the various terminology, as well as the “rules”
of using your card. The following will help you better understand
some typical terms and conditions. But you should read the disclosures
in any card offer you are considering and the Cardholder Agreement
that your card issuer mails you to be aware of all the specific
details for your particular credit card.
Rates
Credit card rates are offered as either fixed or variable. However,
a “fixed” rate (which in financial terms usually means “unchanging”)
really isn’t fixed in the credit card world. An issuer can change
a fixed rate with only 15 days advance notice to the cardholder.
Variable rates are tied to a standard financial index (usually
the Prime rate, as it is published in the Wall Street Journal)
and change along with the underlying rate. For example, the current
Prime rate is 4.25 percent (its lowest level in 45 years). A
typical variable credit card rate might be Prime + 5.99 percent,
which would make it 10.24 percent.
However, you should be aware of a little-publicized fact about
today’s array of Prime-based credit cards. If you have a card
whose rate is tied to the Prime, you would reasonably expect
your rate to drop in lockstep with the Prime. Not necessarily
so. Many issuers impose a “floor rate” on
their cards. A floor rate is a rate established by a card issuer
at which their cardholders’ rate cannot fall below, no matter
how low the Prime or other underlying rate falls. In effect,
floor rates prevent you from benefiting fully from a low Prime.
Check with your card issuer to see if it has a “no-floor-rates”
policy.
Credit card issuers also typically offer low “introductory”
rates as an enticement to you to acquire their card. An introductory,
or “teaser” rate usually lasts for a certain period of time or
for a certain number of billing cycles (for example, four months,
or four billing cycles). At the end of the introductory rate
period, your rate “goes to” (returns to) its normal level. Thus,
this normal, post-introductory, rate is often referred to as
the “go-to” rate.
Introductory rates have always been significantly more favorable
than issuers’ go-to rates, but during the current historic interest-rate
environment issuers have teased like never before. Many issuers
currently offer a 0 percent introductory rate, in effect lending
you money for free. But pay close attention if you’re taking
advantage of a special introductory rate offer and planning to
transfer an existing balance; that great intro rate may or may
not apply to transferred balances.
Fees
As with all financial products and services,
credit card issuers charge fees for various uses – or misuse
– of their card. Always closely read the marketing material with
a card offer to understand the issuer’s fees, and read the Cardholder
Agreement once you acquire a card. A few of the most common,
and controversial, fees are listed below.
An annual fee is simply the fee an issuer charges
once a year for using its card. Typically, if you have good credit
and pay off your balance in full each month, there is no reason
you should have a card with an annual fee. However, if you do
revolve your balance, you’re better suited for a low-interest-rate
card, which often carries an annual fee (in effect, you’re “buying
down the interest rate,” much like paying points to get a lower
mortgage rate).
A late fee can be charged if your payment is
received even just one day past the due date. Late fees nowadays
typically run from about $29 to $39, so you should make every
effort to pay on
time. Many issuers now allow payments by phone or online; even
if you wait too long to mail your payment, you may still have
a timely option.
Some issuers charge a balance transfer fee if
you are transferring a balance from another card to their card.
This fee could run as high as 4 percent, so watch out. If, for
instance, someone transferred the national average balance of
$8,562, at a transfer fee of 4 percent, that would be $342.
A closure fee is a relatively new card industry
fee – and widely reviled by consumer activists. Some issuers
actually charge you a fee to close your account, sometimes as
much as $50. Make sure you ask up-front if the issuer you’re
considering charges this fee.
Terms & Conditions
Finally, to be a truly savvy credit card user you should be aware
of two little-publicized aspects of today’s credit card industry.
First, many issuers use rates as penalties as well as enticements.
For example, while you may have a fairly low interest rate, if
you make just one late payment, your rate might immediately jump
to nearly 20 percent – permanently.
Also, your grace period – the amount of time you have to pay
your bill before interest begins to accrue – could range from
0 to 25 days. If you pay your balance each month, make sure you
get a card with a 25-day grace period. Otherwise, even if you’re
paying in full, you might not have adequate time to avoid an
interest charge.
The same advice that covered rates and fees applies to terms & conditions:
Read and understand the marketing material and/or Cardholder
Agreement. If you have questions, call your card issuer for clarification.
About the Author
Jeff Trachtman is vice president and manager of Fifth Third Bank’s
Bank Card Products unit, which offers a comprehensive array
of credit and debit card products, in-house customer service
and everyday low pricing. A 15-year financial industry veteran,
Trachtman previously served as member relations representative
for Visa, the world’s leading payments brand and the largest
payments system worldwide.
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