Did you “shop” for the Visa, MasterCard or AmEx in your wallet? Chances are, you have it only because you already do business with the same bank or because it came pre-approved with a big line of credit.
Until a few years ago, there was little reason to shop because all cards were about the same, but that’s all changed. One card can cost hundreds of dollars more a year to use than another. Here are nine important features you should compare before you sign up for any credit card:
9 things to look out for in a new credit card
1. Annual percentage rate
For most people the interest rate is the most important feature, because most of us pay finance charges. While many cards charge up to 27% interest, some Visas and MasterCards have rates around 11%-15%.
Even if you never plan to pay interest you should look for low rate cards because few people ever plan to carry a balance; it just sneaks up on them.
2. Grace period
The average number of days you have, from the day your billing period ends, to pay it in full to avoid finance charges. Most cards have either a 25 day grace period or none at all. A few cards will give an extra five days, the five days between the day your bill is due and the start of the next billing period.
There is never a grace period on any card if you didn’t pay your balance in full in the previous month or on cash advances.
- TIP: Maintaining your grace period is very important because a 25 day grace period can actually turn out to be 50 days or more. For example, if you make a purchase on the fifth day of your billing period, you get both the 25 days till your billing period ends plus another 25 days until your bill is due.
3. Annual fee
A very low annual fee is most important to people who seldom carry a balance. If you carry a high balance, you’re probably better off getting the lowest possible rate even if it means paying a somewhat higher annual fee. Avoid cards that have no annual fee but charge a transaction fee on every purchase.
4. When does interest start?
Some cards add new purchase amounts to your average daily balance from the date of purchase; others start from the day the purchase is posted, which can be days or weeks later.
This is important because your average daily balance determines your finance charges for the month. There are other differences in the way finance charges are calculated, but you’d need a computer to figure them out.
5. Cash advance transaction fee
This is a fee some cards charge with each cash advance in addition to the finance charge. While fees of 2%-5% are not unusual, many cards don’t charge a fee.
- TIP: This feature is important for people who are trapped into staying with a high rate card because they can’t pay off the balance. Cash advances can be used to transfer an existing balance from a high rate card to a low rate card.
6. 7. & 8. Late payment, over credit limit & bounced check fees
Some cards charge these fees immediately; others give up to 30 days or longer to correct a problem before they’ll charge you.
9. Fixed or variable interest rate
If a card has a variable rate, what index (T-Bills, Prime Rate, etc.) determines the rate? Some have formulas that cause the rate to move often; others are relatively stable despite a variable rate.
Explore how often the rate has changed over the last couple years. If a card has a very low rate, small changes should not be a major concern.
- TIP: Don’t choose a fixed rate card simply for protection from rate changes; any fixed rate card can change with just 30 days’ notice. The only thing a fixed rate card protects you from is small changes in rates, both up and down.
- TIP: The most economical use of credit cards for most people, next to never carrying a balance, is a combination of two cards. Use one for smaller purchases and pay the balance in full every month. Grace period and low annual fee are most important, but get a relatively low rate just to be safe. Use the second card for larger purchases that you plan to pay off over time. A very low rate is most important, low annual fee is less important, and grace period is not a big factor because there is never a grace period on any card when you carry a balance. Shop carefully for your next card and put the money you save into your own pocket.
Copyright 1989, Bob Cassinelli