Shopping for Credit Cards
Consumers get bombarded by credit card offers every day, and for some, it can be difficult to make sense of the different cards and what they're offering. This makes shopping around for the best card difficult. Fortunately, with the enactment of the Credit Card Accountability, Responsibility and Disclosure (Credit CARD) Act of 2009, things should get a little easier. Here are some of the most important terms of any credit card offer to understand when you're shopping for credit cards.
Laws on Credit Card Disclosures
Credit card offers are largely governed by two major laws, the Truth in Lending Act and the more recent Credit CARD Act. The Truth in Lending Act requires credit card companies to disclose the key terms of the credit card in the solicitation or application. The more recent Credit CARD Act has made a number of changes including:
- Retroactive rates: the CARD Act generally prohibits credit card companies from retroactively changing the rate on an existing balance. For example, companies would promise to loan you the money at a 10% interest rate, and then increase that rate after the fact before the balance was paid off.
- Advance notice of rate increases: the Truth in Lending Act only provided a 15 day notice for key changes on your credit card, this has been increased to a 45 day notice.
- Fee restrictions: many fees are now prohibited, including overlimit fees unless the customer explicitly agreed to allow overlimit transactions, and also fees to use the internet or phones to make payments.
- Payment allocation: your payments will be initially applied to your highest interest rate balances, where companies were doing the opposite before to keep customers owing at the highest interest rate possible.
- More time to pay: credit card companies must now send statements 21 days before a statement is due, under the old law it was 14 days.
The Annual Percentage Rate (APR)
The APR is essentially the cost of borrowing money on a yearly basis. Accordingly, the lower the APR, the less money it will cost to borrow money. All credit card companies must calculate the APR in the same way, so this is the best overall tool to compare credit cards when you're shopping around. There are, however, a few things to be aware of when examining the APR offered by credit cards:
- Introductory/Teaser Rates: many credit card offers will offer you a very low initial rate, which is usually the large, bolded percentage in the offer. Ignore this - you need to determine what the APR is once the initial rate expires. After all, what good does it to you to have a low 6% APR if that will jump to 15% in just six months? Always compare cards by looking at the long term APR.
- Fixed and Variable Rates: fixed rate credit cards have a single APR, and unless your company notifies you that it is being changed, it stays that way. Variable rate credit cards, on the other hand, fluctuate based on some objective indicator, such as the U.S. Prime Rate. Note that this means variable rates are not subject to the same disclosure rules for rate increases, since the rate itself regularly fluctuates.
- Grace Periods: some cards will offer you a grace period, which is an interest-free period between your purchase and when the bill is due. If you plan to always pay off your balance quickly, this can save you money.
- Calculating Balances: look to see how your actual balance will be calculated. This is the balance that the APR will be applied to and what will determine what you owe in any given billing cycle.
The way many credit card companies make their money is actually on fees, so really examine the kind of fees you'll owe or be subject to - it can make a huge difference:
- Annual/Maintenance Fees: many cards will charge you an annual or yearly maintenance fee just to use the card. Whether there is a fee or not will often depend on the interest rate, with lower interest rate cards often trying to compensate by having annual fees.
- Transaction Fees: many cards will charge you different fees based on what kind of transaction you're doing. Common examples include cash advances and balance transfers. These transactions may have fees associated with them.
- Late Fees: all cards will have some sort of late fee attached to it. Make sure to read the terms to identify the penalty and how long you have before late fees are included.
Credit Card Rewards Programs
Most credit cards try to lure you in with credit card reward programs. While it may be tempting to choose a card based on the kind of rewards it offers, resist the temptation. Even if one card gives you more "points" than another card, if you end up paying more in fees and on interest then you've actually lost money. Even worse, you're now stuck with restricted "points" instead of the money that you could have used as you please if you had used a card with less perks, but bigger overall savings.
Credit Cards Offered by Groups
Finally, it's always worth exploring whether some group you belong to offers a credit card. Many professional organizations and universities offer credit card deals to their members, and some of these really are good deals. In particular, credit unions typically have some of the best deals available, so consider joining a credit union as well.