Picking the credit card that’s right for you can mean the difference between being fortunate and owing a fortune.
It’s not hard to find a credit card. Actually, you’ll probably get so many card offers that the hard part will be choosing the one that’s best for you. The adult card market is pretty much saturated, and studies have shown that people become very loyal to the first card they get. So card companies do everything they can to sign up younger customers. Even if you’re sure you won’t let yourself become tied to one card for life, it’s still crucial to find the card that’s right for your needs from the start. That means thinking about how you’ll use a card and what elements of credit are the most important to you.
PICK A CARD…BUT NOT ANY CARD
If you know you’ll pay your bill in full every month, you’ve got a fairly easy choice. Since you won’t have to worry about what interest will cost you, look first for a card with a grace period.
A grace period is the time between when your bill is mailed and when payment is due. If you’ve paid the previous balance in full and on time, interest doesn’t start accumulating on your charges until after the current payment is due. This means that you’re using credit without having to pay a finance charge—probably the smartest use of credit there is. If you pay your credit card bills by mailing a check, you’ll want to be sure that you allow enough time for payment to reach your creditor. If you pay online or with your phone, you’ll want to confirm when the payment will be debited from your account and how many days you need to allow for the transaction to be processed.
OUT OF GRACE
Of course, you may not pay off your bill every month. Many people don’t. In fact, the average person under 35 owes $5,800 in credit card debt. If you’re likely to pay only part of what you owe each month, the grace period becomes insignificant since you’ll never get the benefit of it. Anytime you have an unpaid balance after your statement’s due date, interest accumulates on all of your purchases, even the new ones.
What matters most in this case is the interest rate, or finance charge. The higher the rate, the more using credit will cost you.
Before the Credit CARD Act of 2009, creditors could play games with the due date of a credit card payment, but no more. The grace period must be at least 21 days, always due on the same date each month. Any payment that arrives by 5 p.m. on the due date has arrived on time. It can not be an arbitrary time, like 10 a.m.
What’s more, payments due on weekends, holidays, or other times when the creditor doesn’t process payments aren’t subject to late fees if the payment arrives the first business day after the due date.
A FEW POINTS OF INTEREST
The biggest factor in what any card costs is its annual percentage rate (APR). For example, if your card has an APR of 18%, you’ll pay 1.5% interest on your balance every month. That means if you owe $1,000, you’ll have $15 added to your bill. That may seem like a small amount, but what if you’re only paying the minimum amount each month, probably $15 or $20? You’ll barely be making a dent in your balance.
Pay attention to the way a card company calculates interest, too. It can have a substantial effect on what it costs you to use one card rather than another.
Most cards use your average daily balance, which is the average of what you owed each day in the billing period to figure your interest. So, for example, say you had a previous balance of $2,000 on the card with an 18% APR, and you pay $1,000 on day 15 of a 30-day period. You’d owe a total of $22.50 ([$2,000 x 1.5% x 15 days + $1,000 x 1.5% x 15 days] ÷ 30 = $22.50). Under this method, you’ll save money by paying off a large amount of your balance during the billing cycle.
The adjusted balance method is the cheapest of all. The card company subtracts whatever payment you make from your beginning balance and charges interest based only on the remaining amount. So if you paid off $1,000 of a $2,000 bill, you’d pay interest on just the remaining $1,000. That would only cost you $15.
But if the lender charges interest based on your previous balance, payments you make during the month don’t reduce that balance. Instead, you have to pay interest based on the full amount you owed at the start of the period, making it the most expensive method—you’d owe $30 ($2,000 x 1.5%) in this case.
DON’T BELIEVE THE HYPE
When you don’t have a lot of money or credit, all of the offers pouring into your mailbox—and into your email inbox can be very seductive. Try to resist the urge to sign up with the card that has the flashiest package, or promises perks you don’t need. Instead, focus on the fine print: Every card is required by law to include a disclosure box somewhere in its promotional materials. There you’ll find the information you need on interest rates, annual fees, and the other important elements of a card agreement. So if the rate in huge type on the front of the envelope looks too low to be true, check the disclosure box to find out the real story.