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A Guide to Choosing the Right Credit Card

Credit cards are a convenient and useful part of most individuals' financial lives. Choosing the right credit card and then using it wisely is important and can make large differences in your finances. Here are the factors that should be looked at as you make your decision as to which card to apply for:

Annual Fees
Some credit card issuers charge an annual fee to help offset costs that they incur in maintaining accounts. Since so many cards have no annual fee we generally encourage consumers not to choose a card that has an annual fee, but there are two exceptions:

Many rewards cards do charge annual fees. It's up to the consumer to determine if the amount of the reward they will earn by using the card will overcome the cost of the fee before they apply.

Some people with poor or damaged credit will only qualify for credit cards which charge an annual fee. Later on, as they rebuild their credit these consumers may be able to negotiate away the annual fee or move on to a card that does not charge an annual fee.

Annual Percentage Rate (APR)
The APR is the yearly interest rate or percentage that the cardholder pays on their outstanding balance in the form of interest. The larger the balance that the cardholder expects to maintain, the more important it is to acquire a card with a lower APR. What is the APR for purchases? For cash advances? For balance transfers? Is there a penalty rate if you make late payments?

Balance Transfer
A Balance Transfer is the process of moving an unpaid credit card balance from one issuer to another, usually to a card with a lower annual percentage rate to lower interest charges. First time applicants or consumers without appreciable balances do not have to consider this option. Others should make sure that balance transfers are offered by the new bank before they apply. Consumers should also look beyond the introductory rate offered by the new card to make sure that the savings will continue past the introductory period.

Charge Card
Charge Cards require that the balance is paid in full each billing period, usually monthly. There is no APR since there is no balance carried over. American Express and Diner's Club both have charge cards for your evaluation on our site. These are rewards cards and do charge annual fees.

Credit Card
A type of payment card that involves a revolving line of credit that is issued to the cardholder. They provide flexibility, allowing you to pay your whole bill at once or over time in increments. If you do not choose to pay your balance in full each month, you will be required to make at least the minimum payment and to pay finance charges on the remaining balance. Credit cards are issued by banks, credit unions, and some retailers like department stores and gasoline companies, among others. Because of the flexibility offered by credit cards, we recommend them for most consumers, but stress that it is costly to not pay them off in full at the end of each billing cycle since the rate of interest is likely much higher than any other type loan.

Credit Limit
The Credit Limit is the maximum amount you can borrow using your card. Make sure that the card you apply for has a credit limit that far exceeds the total of your monthly spending and expected balance if possible since staying close to your credit limit, even though you don't exceed it, may negatively effect your credit score.

Customer Service
Many banks and financial institutions offer toll free customer service numbers to handle problems. Some issuers provide concierge services on their premium credit cards. Be certain the issuer provides the level of customer service you desire before you apply.

Disclosure Statement
Certain key pieces of information must be included in all solicitations or applications for credit cards. Look for a link to the disclosure statement on each online application. It will look like a box with info on interest rates, fees, and other terms for the card you are considering. Read this information carefully before you apply.

Sometimes additional fees apply for cash advances, balance transfers, charging amounts over your credit limit, and late payments.

Fixed Rates
An APR that does not change in response to interest rate changes and conditions. This does not mean that the rate will never change. Just that the rate is not tied to an index.

Grace Period
A period of time — usually 20-25 days — when you're not charged interest for purchases you've made. For example, if the billing date on your credit card bill is May 1 and you have paid your prior balance in full, you may have until May 20 to pay your new balance in full. If you do, you will not be charged interest. If your payment arrives after May 20 — or if you don't pay the entire balance — you may be charged interest from the date of purchase as posted. Some accounts have no grace period, which means interest is charged on purchases from the date they are posted.

Introductory Rates
A special APR that applies for only a limited period of time. Sometimes also called a teaser rate. Consumers should make decisions as to which card to apply for based on the final rate, not the introductory rate.

Prepaid/Debit Cards
Debit and ATM cards are types of payment cards that provide a convenient and secure alternative to cash and checks. They allow you to make a purchase and to access your bank accounts anywhere through the use of an ATM machine. These cards are recommended for people who want the convenience and functionality of a Visa or Mastercard card without interest charges or late fees.

A point accumulating program based on purchases or transactions made on your card. These points can be redeemed for the particular program you enrolled in (e.g. airline, gasoline, etc.) Banks may charge annual fees to participate in rewards program. Consumers should consider three things when considering a Credit or Charge Card which offers rewards:

Will the amount of the reward earned by using the card overcome the amount of any annual fee and possibly higher APR on balances that using the card accrues?

Will the consumer actually benefit from the award? Earning points toward a product or service that the cardholder is not going to use is not a benefit.

Is the reward convenient? Does flying a particular airline, staying with a particular hotel chain or using a certain brand of gasoline make sense for the cardholder's lifestyle?

We generally prefer cash as a reward for it's convenience and versatility.

Secured Card
Secured cards are a great first step for those with little or no credit history. This type of card requires that a security deposit be made in order to establish a credit line. Your credit line will typically be equal to the amount of your deposit.

Variable Rates
An APR that periodically goes up or down based on fluctuations in market interest rates as reflected in a published index (e.g., the prime rate published in the Wall Street Journal).

Our Assessment:
By law Consumers are given the tools to assess each credit card in the disclosure information. They should take the time to look this information over and compare cards from a variety of issuers

Also see: (Glossary of Credit Terms)




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