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Cooperative Extension Service |
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Agricultural
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Early Childhood
Dale Bumpers College
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Credit CardsIntroduction • Annual Fee • Finance Charge • General Advice for Selecting a Card There's more to choosing a credit card than just accepting the first offer you receive in the mail or signing up for a card because of a free gift. Credit cards are like other consumer purchases. They come in a variety of styles, brands, makes and models and the amount you pay to use one depends upon their features and terms. The initial step in selecting a credit card is to know the definitions of the terms associated with credit. Once you understand the terminology, you'll be better equipped to compare the hundreds of offers you'll receive on an annual basis. A flat, yearly charge similar to a membership fee. This fee generally ranges from $25 to $50. The annual fee for a "gold" or "platinum" card may be higher. Some card offers advertise "no annual fee". Be sure to read the fine print. Fees may be waived for the first year only. Annual Percentage Rate (A-P-R) A measure of the cost of credit, expressed as a yearly rate. Use the A-P-R as one tool to compare the costs of using various cards. The A-P-R may be "fixed" or "variable." A fixed rate remains the same until the credit card issuer gives written notice of a change. Federal law requires card issuers to give consumers 15 days' notice before changing the interest rate. A variable rate is subject to change when interest rates other economic indicators (indexes) change. Some common indexes used by issuers to determine interest rates are the prime rate, the Federal Reserve discount rate and the on-, three-, or six-month treasury bill rate. A variable rate is calculated by adding a fixed percentage (margin) to an index. For example if the A-P-R on a card is variable and based on the prime rate with a 9.9 percent margin, the interest rate will be calculated as follows:
Before accepting a credit card with a variable rate ask these questions: 1) Is there a minimum and maximum A-P-R? 2) How often and by how much can the rate change? One additional note about interest rates. If you can see it, read the fine print carefully to determine exactly what rate you will be paying. Some cards advertise fixed rates, but reveal in the fine print that a different (usually much higher) rate applies to cash advances. Also remember that a fixed rate can be changed at any time as long as the card issuer gives 15 days written notice. The total dollar amount one pays to use credit. The finance charge includes interest costs and all charges associated with a credit transaction. Grace or Free Period The number of days you have before a credit card company starts charging interest on new purchases. Some cards have no grace period. Most grace periods are between 20 -25 days. Be aware that a grace period applies only if you have paid your balance in full each month. Periodic Rate The interest rate the card issuer applies to your outstanding balance to determine the finance charge for each billing cycle. Transaction Fees A fee imposed for using your card for a cash advance, failing to make your payment on time, or going over your established credit limit. Some card companies charge a monthly fee for not using the card. General Advice for Selecting a Card If you're likely to pay your balance in full each month, look for a card with no annual fee and a lengthy grace period. When you pay in full, the interest rate doesn't matter. If you're the type that typically carries a balance from month to month, search for a card with a low interest rate. Be cautious, however, of card companies that offer a very low introductory rate. Called "teasers", these low rates don't last more than three to six months before changing to much higher rates. If you sometimes pay the balance in full while on occasion you use a credit card to pay for purchases over time, consider having two cards. One with no annual fee and grace period for the balance you pay in full each month; another with a low A-P-R for when you pay over time. Some card companies offer incentives to those who use their cards in the forms of rebates and or rewards. Rebates allow you to earn cash back. Rewards can earn you a free airline ticket, free gasoline, and/or a discount on a new car. Enhancements or "perks" promise rental car insurance, buyer protection plans, etc. These benefits generally come with a price tag in the form of an annual fee, a higher A-P-R, or both. Before opting to pay an annual fee or higher rate of interest for a card that offers extra benefits, ask these questions: 1. How much extra am I paying for these benefits and are they really worth it? 2. Do I already have coverage for some of the benefits through other insurance policies or cards? Before you select a credit card, carefully evaluate all the terms and conditions for each card you are considering. While it may be tempting to choose a card with the best bonus or rebate, this method does not always prove to be the most economical. Shop for a credit card as diligently as you would a new vehicle or any other consumer product or service. Remember, money not spent on credit card interest is money you can put into your savings account. Use the form which follows to comparison shop for a credit card that is best for you. Comparison Shopping for a Credit Card
* Other features might include: Frequent Flyer Bonus Points, Rental Car Insurance, Cash Rebates, Buyer Protection Program, Free Credit Life Insurance, Discounts on Products and Services, Free Products and Services. |
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University of Arkansas • Division of Agriculture |
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