Choosing the right credit card for your needs is important and will save you money in fees and interest. Not all credit cards are the same. They have different rates, fees, benefits, features, points, ratings, limits, cash features and the list goes on and on.
Use these tips to help you pick the right credit card.
1. Determine how you will use your Credit Card
Yes there are different ways to use a credit card. Here are a few of the more common ways to use a credit card and the benefits of each.
- Purchasing an item and paying only the minimum payment. This usage of a credit card is typically discouraged. If you only pay the minimum payment, you will carry a balance from month to month and be charged an interest fee. Even if you pay extra every month, but still carry a balance to the following month you will be charged interest on the balance. If you anticipate this action on your credit card you will want a card with a low interest rate.
- If you plan to use your credit card and pay the total balance off before the end of the month, rate will not be as big of a factor. Look for a card with a longer grace period and one that has no annual fees.
- If you plan to take cash advances on your credit card you will want to find a card with little or no cash advance fees. Also keep in mind the interest rate on cash advances. Often times money taken on a cash advance will accrue higher interest credit used for a standard purchase.
- Collection of Miles and Reward Points is common use for credit cards. Often times people combine this technique with paying off the total balance every month. Selecting a few common purchases like grocieries and gasoline will help build points and miles quicker. Remember miles or points credit cards typically have annual fees, and cash advances do not usually accrue miles.
2. Finding the Best Interest Rates
The interest rate on a credit card is stated as the APR or Annual Percentage Rate. The interest rate will determine the interest accrued for cash advances, transfers and balances carried from month to month.
Credit cards can carry different rates for many different aspects of the borrowing process. Here are some of the APRs you may encounter with a credit card.
- Introductory Rates: Credit Cards will often times offer a lower rate for purchases made within the introductory period of the card. The Introductory period lasts from the time you open the card until the introductory term expires per the contract. Many times the introductory rate will be 0% or close to that in order to entice you to borrow or transfer money immediatley after opening the credit card.
- Purchases, Cash Advance and Transfers: Credit cards may have different rates for common purchases, cash advances and transfers from other credit cards. Most of the time the cash advance and balance transfers will have higher interest rates then standard purchases.
- Balance Rates: Credit Cards may charge different interest rates depending on the balance of your credit card. For example: If you have a balance of $1-$500 you may have a rate of 13%. And for a balance over $500 your rate may increase to 15%.
- Penalty Rate: A penalty rate will typically occur when you have been late on a monthly payment. Penalty rates are usually very high. For example, your rate may be a 14%, but if you miss a payment or miss a few payments within a certain time frame your penalty rate of 28% may now apply.
- Post Dated APR: You will see these usually as special offers. A credit company may offer no interest for 6 months, or no interest until a certain date. Be sure to know what the interest will be after the special offer expires. Note: Most of the time if you do not have the balance paid off before interest starts accruing the credit card company will charge interested based on either the original balance or current balance, which ever is HIGHER. That means if you started out with a $2,000 purchase, have paid it down to $300, but your no interest time frame expires they can charge interest on the $2,000.
Fixed and Variable Credit Card Rates
A fixed rate credit card does not necessarily mean that the rate will be fixed the entire time you have the account open. It will remain fixed, but if the credit card company changes the rate they are required by law to notify you of the change.
The Variable rate credit cards are usually based on other financial market information. Most follow the prime rate, and if the prime rate moves up or down your credit card rate will follow.