CREDIT CARDS

In this site:

+ Background on credit cards
+ What are the important terms and conditions with credit cards?
+ How to choose the best credit card for me?

Background on credit cards
Millions of Americans own and use credit cards, and for obvious reasons. A credit card is a great financial tool- it can be more convenient to use and carry than cash, it offers the ability to buy goods and services now and pay for them later, it can guarantee hotel or travel reservations, it is accepted by merchants around the world, it can provide a source of cash or payment in an emergency, and it offers valuable consumer protection under federal law. Credit cards are essentially personal lines of credit that can be used for a variety of purchases (including obtaining cash), and are usually unsecured by any asset. When using a credit card, you are borrowing money from the credit card company and repaying the company back by making monthly payments on your account. [Although they look the same and can be used for payment the same way, debit cards are different in that the money you 'charge' is taken directly out of your checking or savings account- no actual 'credit' is being extended to you.] Although all credit cards and credit card companies are basically offering the same service (unsecured credit), the important differences are in the details. This site is designed to help you understand those details and how credit cards work so that you can find the best credit card and credit card company for you.

What are the important terms and conditions with credit cards?
When looking for the credit card that's right for you, there are some obvious considerations, but some terms and conditions that are not as apparent but that can have a significant impact on the service you get. All credit cards basically offer the same thing- unsecured credit, so make sure that you find the credit card that's right for you. Here are the most important terms and conditions to look for:

Annual Percentage Rate (APR)
The APR is a measure of the cost of credit, expressed as a yearly interest rate. The higher the APR, the more you will pay in interest on outstanding debt. Less than half of all U.S. states have legislation to cap credit card interest rates, and few credit card issuers are actually based in these states. The APR is the single most important consideration when choosing a credit card for you, so make sure you find the lowest rate possible with the other terms and conditions that you like. The APR available to you will depend almost exclusively on your credit score.

Many credit card companies will offer promotions that have a lower APR for a certain time period (six months, for example), but after the introductory period is over will raise your rate to the 'normal' APR. When looking at the APR in the terms and conditions of the credit card you're considering, make sure to also look at the APR for balance transfers and cash advances as these can vary dramatically. Many credit card companies will offer low introductory rates for balance transfers and encourage you to move your balances to them, but then raise the rate after the introductory period is over.

Variable rate credit cards are becoming more popular as they minimize the risk to credit card companies. These variable rates are tied to a public interest rate like the Prime Rate and will go up and down depending on the base rate, or index. Once the interest rate corresponding to the index rate has been set, the credit-card issuer then adds a number of percentage points -- called the margin -- to this index rate to come up with the rate the consumer will be charged.

[In reality, even if your APR is fixed, the lender does have the right to raise your rate! The federal Truth in Lending Act requires the lender to provide at least 15 days notice before raising the rate. In some states, there are laws that require more notice.]

Annual fees
Many credit card companies charge an annual fee for granting you credit, usually between $15 and $55, but the better your credit score, the less likely you'll have to pay an annual fee.

Minimum monthly payments
Most revolving credit cards will require your minimum monthly payment to be between 1-3% of the outstanding balance every month, and there is usually a minimum payment required as well. Charge cards, which are slightly different versions of credit cards, will typically require payment of the entire balance every month (but they do not charge interest).

Grace period/payment schedule
The grace period is the time between the date of a purchase and the date interest starts being charged on that purchase. If your card has a standard grace period (usually 20-30 days) you have an opportunity to avoid finance charges by paying your current balance in full. Some issuers allow a grace period for new purchases even if you do not pay your balance in full every month. If there is no grace period, the issuer imposes a finance charge from the date you use your card or from the date each transaction is posted to your account.

Late payment/over limit penalties
Most credit card companies will penalize you if your payment is not received on time. They will charge you a late payment fee that can either be a flat rate or can be scaled according to how much the outstanding balance is. Alternately, some credit card companies will raise your APR if you have a late payment. This could be extremely costly, so the best advice is to always make sure to get your payment in on time, and know what the consequences will be if you don't. Most credit card companies will also penalize you if you exceed your credit limit, and this can be by either charging you a fee or raising your rate.

Transaction fees
Some credit card companies will charge you fees for cash advances, wire transfers, person-to-person money transfers, bets, lottery tickets and casino gambling chips. These transaction fees are usually around 3% of the total transaction and can have a minimum- usually around $5.00.

Rewards/cash back
Some credit card companies like to promote their services by offering such incentives as reward programs and/or cash back on purchases you make with the card. Typically, you will earn a certain number of airline miles, or hotel credits, or any number of products/services for each dollar you charge on your credit card. Some will credit you a certain monetary amount (usually a percent or two) of the total that you charge on your credit card in a given time period and will send you a check for the amount 'earned'.

How to find the best credit card for you?
As mentioned earlier, your credit score will basically determine the interest rate that you are eligible to receive on your credit card. The best rates are offered to consumers with good credit.

Knowing, and managing, your score gives you the best opportunity to maximize your credit score and lower your credit costs.

If you are looking for your first credit card, there are banks and credit card companies that specialize in extending credit cards to applicants who are just establishing a credit history. Don't apply to more than one at a time because credit applications do show up on your credit report, and multiple rejections make you look desperate for credit. If your first application doesn't get you a credit card, you should consider applying for a department store credit card or a gas station credit card and build a credit history using those cards. These cards are sometimes easier to obtain than traditional credit cards. Finally, you may consider applying for a secured credit card- these require you to put money into an account that is held by the credit card company as security against the line of credit.

NOTE: If you feel like the interest rate you're paying on a current credit card is too high, simply ask your credit card company for a better rate. Many credit card companies will do this, especially if you are considered a good customer, and would rather retain you as a customer than risk losing you. If your credit card company won't lower the rate for you, you can always switch to a card with lower rates, but be aware that this may impact your credit score.

When applying for any credit card, here is a list of questions that you should find the answers to before submitting your application. Remember, it's the details that are important, and not doing your homework could turn out to be very costly in the end.

Is there an introductory rate, what is it and how long does it last?
After that, what will my rate be?
Is there an application fee?
Are there processing fees?
Is there an annual fee?
Is there a late fee?
Is there an over-the-limit fee?
Are there any other fees, like account termination fees or balance transfer fees?
When and how can a variable rate be changed?
When and how can a fixed rate be changed?
What is the grace period before interest is applied?
How will you inform me of any changes in my contract?
Will the company inform me if I am about to go over my limit?
If I go over my limit, what happens?
What is the company policy if I have trouble paying my bill?

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