Credit card rates vary widely, from under 10 percent to up to 30 percent or more. Annual fees also vary widely. Compare the annual percentage rates (APRs) and annual fees (which are not included in the APRs for credit cards). Only approximately one-third of credit card users shopped around for their last cards.
In deciding what terms are important, first decide how you plan to use the card. If you intend to use the card as the equivalent of cash and pay it off every month, the APR would appear to be less important. However, the fact is that about 60 percent of Americans who have credit cards carry a balance, and many people who don’t plan on carrying a balance do so because they encounter unexpected major expenses. Consider how you have actually used credit cards in the past. Unless you have not carried a balance for years and are immune from loss of employment, major expenses, or other circumstances that might result in your carrying a balance, you need to get the lowest-APR card that otherwise satisfies your needs.
NOTE
Cards with the lowest APRs typically do not offer airline miles and other rewards.
If you have consistently paid off your balance every month and reasonably expect that you will continue to do so, then you may want to focus more on fees and rewards. Compare the value of the rewards you expect to receive (and use) each year with the annual fee you might pay. You should only look for rewards cards if you have above-average credit and you pay your bill in full each month.
Be careful of credit card advertisements. Some ads, particularly for subprime cards, offer a credit limit “up to” a certain amount if you qualify for the maximum. A low credit limit can be very detrimental. Because your utilization of credit is a major factor in determining your credit score, maxing out a card with a low credit limit can hurt your credit score. In addition, subprime cards are often “fee-harvester” cards, in which a major portion of the issuer’s income consists of over-the-limit and other fees. The extent to which such fees could be imposed was restricted by the Credit Card Accountability Responsibility and Disclosure (CARD) Act and the Dodd–Frank Act, but there are still some bad deals out there.
CAUTION
Avoid misleading credit card advertisements.
Many ads list multiple rates or a range of rates, and you won’t be informed of the actual rate you will get until after you’re approved. Don’t assume you will get the lowest rate advertised. Would you be satisfied with the highest rate offered? If you are not comfortable with the rate you receive, don’t hesitate to reject the offer and cancel.
If you intend to transfer your balance from one card to another, compare the interest rate you are paying now with the rate you’ll pay over the life of the new card—not just the introductory rate. Also, most credit cards charge a fee to transfer your balance. So even though a 0 percent interest rate on balance transfers may sound appealing, it may be “too good to be true.” A one-time fee of 2 to 5 percent of the balance you’re transferring is common. Because 1 percent of $5,000 is $50, this is not insignificant.
Check for a penalty APR. The regular APR can increase drastically if just two payments are late—even one day late—within a six-month period. All credit card offers must tell you what the penalty rate is, what triggers it, and how long it will last. Many subprime credit card issuers plan on making a major portion of their income from penalty rates.
Check for different APRs for different types of transactions. If you intend to use the credit card for cash advances, the APR for cash advances may be much higher than that for purchases (1 to 7 percent higher). Also note how cash advances are defined. Certain types of transactions that you may not think of as a cash advance are treated as such. For example, Bank of America treats the purchase of foreign currency, money orders, or traveler’s checks as a cash advance, as well as person-to-person money transfers, bets, and the purchase of lottery tickets, casino gaming chips, or bail bonds.
Check what the grace period is. Many credit card issuers have reduced the minimum interest-free grace period from the traditional twenty-five days to twenty. The shortened grace period, in effect, decreases the time you have to get your payment in before interest is charged and increases your chances of being late on a payment. A few issuers have no grace period at all.
Check for fees. Again, fees are generally not counted in the APRs for credit cards. Common fees include an annual fee, a cash-advance fee, and a late-payment fee. If you’ll be transferring a balance, take a close look at balance-transfer fees. Many subprime cards have unusual fees.
People often overpay for open-end credit. Be wary of retailers that offer 10 or 15 percent off a purchase if you open a department store card. Most store cards have higher APRs than you can obtain elsewhere. If you don’t pay off the balance in full when you get the bill, the interest on the purchase for a couple of months can exceed any savings from the initial discount. Most such offers are not worth it.
CAUTION
Beware of store credit card promotions.
Make certain you are informed of the APR, fees, and material terms on any credit card issued to you. In 2013, the Consumer Financial Protection Bureau obtained a consent order against General Electric CareCredit for allowing medical and dental offices to arrange credit card financing for expensive procedures without making the required disclosures to the patients (In re GE Capital Retail Bank, 2013-CFPB-0009, available at http://files.consumerfinance.gov/f/201312_cfpb_consent-order_ge-carecredit.pdf). We see repeated complaints concerning promotional credit offers by retailers in which consumers are promised that there will be no interest if the credit is paid off within a certain period. Consumers often do not understand when the period ends, whether payments will be required during that period, or what rate will apply if they do not pay off the credit by the specified date.
CAUTION
Beware of misleading promotional rates on credit cards.
Credit card interest rates are often negotiable. Banks compete for the business of persons who are likely to repay them. Many people receive mail from either their current banks or banks they do not presently do business with offering low- or zero-interest credit for various periods. Many of these offers specifically seek to have people transfer balances from other cards. However, there is usually a fee for transferring balances, so call your current bank or credit union first—if you have decent credit, your current bank may be willing to negotiate a lower rate, match a promotional rate, or waive annual fees to keep your business. Your bank won’t lower your APR just because you’ve been taking care of your credit; you need to call the bank and ask.
TIP
If you are happy with your service but think you’re paying too much in interest and fees, see if your credit card issuer will match or beat the terms and rate on the new card you’re considering.
If you move your account and plan on closing your old account, do not close your old account right away. Continue to make at least the minimum payment until you know the balance transfer has been approved and executed and the balance on the old card is zero. There are a couple of reasons for this. First, balance-transfer offers often provide that the bank has the right not to honor the request. Second, if you have been carrying a balance at a rate greater than zero, the standard methods of computing interest on credit cards will result in “trailing interest.” What this means is that if you receive a statement showing a balance of $1,000 and have carried a balance during the preceding period, paying $1,000 by the due date on the statement will not result in paying off the account. If you mail a check for $1,000 by the due date, you will receive a statement the following month for interest on the $1,000. Furthermore, this will occur every month until the “trailing interest” is a trivial amount. You can call the bank and get the amount that, if received by a certain date, will result in the account being paid off, or you can estimate the interest and send it along with the $1,000.
Therefore, wait until you have confirmed a zero balance before you close the old account.
If you are applying for a home mortgage, wait until you have closed on the loan before applying for a new credit card. Although new credit card applications do not have a major impact on credit scores, mortgage lenders do not like to see applicants requesting new lines of credit before they close on a loan.
Be careful with cards offering “no preset spending limit.” This does not mean that there is no credit limit. What it means is that a card’s spending limit is determined on a month-to-month basis and that the issuer will not inform you (or the credit bureaus) of what it is at any time. This creates the possibility that your card will be unexpectedly declined. In addition, with such a card, the amount of credit used is compared to the high balance. This may adversely affect your credit score.
Summary
Select a credit card based on how you have actually used credit cards in the past. Look for rewards cards only if you have above-average credit and pay in full each month. Beware of promotions. Consider asking for better terms from your existing credit card company.