Which Credit Card Fits Your Wallet?

By Michael Peterson
In October 31, 2004

Many of us are bombarded on a daily basis with low-rate and no-rate credit card offers. Several a day can be seen stacked in mailboxes everywhere. But, the real question is, what do we do with these? Deciding whether to file them in the recycle bin or actually consider signing up is a chore in itself. Knowing what to look for and why you need the card is the first step in making smart choices when it comes to credit cards.

Credit card offers are tempting, yes, but without knowing the proper questions to ask, they can turn into a financial nightmare. Below are several definitions that should help the innocent consumer choose which credit card to accept and which to shred.

Know Why You Need a Credit Card.
Just because it’s on sale, doesn’t mean you can afford it. Think twice before increasing your credit card debt. Those offers are meant to lure you in, with the hope that you’ll spend more. In many cases, they’re successful. However, on the flip side, credit cards can be a good way to transfer higher rate balances to lower ones. But be careful. Usually, those low or no interest rates have an expiration date. And, when they expire, they’re most likely worse than the rate you’ve traded them for.

Reading the Agreement.
One of the most grueling tasks in accepting a credit card is the effort involved in reading through all of the lengthy paperwork. Who has the time?

Here are some common terms likely to be seen on credit card offers and agreements, which you should review before signing up:

  • APR – Annual Percentage Rate. There are two types of APR’s:
    1. Effective APR – This represents the effective interest rate on your card, including “additional” interest that is hidden in annual fees or transaction fees. This number is usually expressed as a percentage.
    2. Corresponding APR – This is the rate of interest you pay when you carry a balance on cash advances or purchases.
  • Grace Period – Also known as a ‘Free Period’, this is a term usually expressed in days. The number of days represents the time you have to make your payment without incurring any additional finance charges.
  • Fixed Rate – A constant rate of interest on the credit card. This can be either:
    1. For the life of the amount borrowed
    2. For a short period of time. These are called ‘teaser-rates’. Be careful. When they expire, the rates may skyrocket.
  • Variable Rate – A fluctuating rate of interest on the credit card. This is usually tied to an index. Learning which index and how often it changes is critical to choosing this type of option.
  • Annual Fee – A yearly charge, which will automatically appear on your credit card, just for the privilege of having the card. This will appear when you first open the card, as well. Not all cards charge an annual fee, be sure to look for this in the agreement.
  • Transaction Fees / Other Charges – These are fees charged, in addition to the interest rate, which appear on your statement. They may include charges for cash advances, late payments, and exceeding the credit card limit.
  • Finance Charges – Usually expressed in currency, these are the cumulative interest charges applied to your balance for the monthly cycle. They typically include the APR on your balance plus any other transaction fees. Some credit cards have a monthly minimum finance charge and knowing what this is should be a factor in your decision.

Remember that although these rates and charges are printed on the agreement, sometimes they can be negotiated. A simple call to the credit card expressing interest in the offer may bring about surprising results.

Other Factors to Consider:

Thinking of Buying a Home?
If you either have a lot of debt or have borderline or bad credit, you may want to think twice about accepting any new credit card offers. If you want to purchase a home, the lending institution will do a credit check. Every time you accept a new credit card, it adversely affects your credit rating. You may want to hold off until after you purchase your home or until you’ve paid off some existing debt.

Making Monthly Payments.
If, when you use a credit card, you expect to pay off the balance in full each month, you are looking for different options than the borrower who makes the monthly minimum payments.

For example, the APR will mean much more to the borrower who keeps an outstanding balance. In addition, if you pay the card in full, you might not mind paying an annual fee if you know you’ll get airline mileage points with your spending patterns.

Knowing how popular a credit card is will help you decide if you can use it at your regular establishments. Regardless of how many options or benefits the card may offer, if you cannot use it, it’s useless.

Shop Around.
Doing a little comparison shopping can go a long way. Many credit card offers come in the mail on a daily basis. Instead of deciding on the spot, put them aside for a week or two. The expiration dates are usually at least 30 days. When you have a few collected, pull them all out and compare notes. If you’re very interested in one, but it has something unfavorable (like an annual fee), don’t be afraid to call the credit card company and try to negotiate. These companies are eager for new business and might work with you.

Being a smart credit card consumer will pay off in spades when determining which credit card fits your wallet? Being prepared, knowing what your rights are, and what to expect from the credit card companies will make the tempting offers much easier to choose or lose.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

Click "More" for important American Credit Foundation client transition information