Shopping for Credit Cards

Before signing up for a credit card, learn about the key credit terms.

If you are in the market for a credit card, you can save yourself lots of money by shopping around. Credit card terms and interest rates vary -- and some of those variations can make a huge difference to your wallet. Before you sign up for a new card, make sure you understand that card's important credit terms. Then shop for the card with the best interest rate and terms.

Important Terms

The federal Truth in Lending Act (15 U.S.C. § 1601 and following) requires credit card companies to disclose the key terms of the credit card in the application or solicitation. The interest rate is a good start for comparison shopping. But don't ignore other terms -- they can cost you hundreds or thousands of dollars as well, depending on how you use your card. Here are the basic credit terms that must be disclosed and what you should look for in each one:

Annual percentage rate. The Truth in Lending Act requires credit card companies to disclose the interest rate as an annual percentage rate (APR). The APR is the cost of credit, expressed as a yearly rate, such as 7.99%. If different APRs apply (for example, to balance transfers or cash advances), they must also be disclosed. The APR is like the price tag for credit. Because federal law requires that the APR be calculated in a standard way, it allows you to compare the cost of credit among different credit card companies using a single yardstick. The APR is the best indicator of the actual interest you will pay.

If you never carry a balance on your credit card, then the APR is not important. You won't ever pay interest. But, if you don't pay your bill in full each month, the APR is crucial. Obviously, the lower the APR, the better. But, be sure to read the fine print. Some cards have a low "introductory rate" (also called a "teaser rate"). After a few months, the interest rate will go up. Also, sometimes the advertised rate only applies to certain people, such as those earning a high income. The card company charges a much higher rate to those who don't qualify -- which could mean an unpleasant surprise when your first bill arrives.

Variable rate information. Some APRs vary monthly based on a benchmark such as the prime rate. The application or solicitation must disclose that the rate may vary and state how the rate is determined.

Grace period. This is the interest-free period of time between the purchase date and the bill due date. It is usually available only to those who do not carry a balance. If you pay your bill in full each month, make sure you have a grace period -- some companies no longer offer them. If there is no grace period, you'll pay interest from the date of your purchase. If you carry a balance, a grace period is less important.

Method of computing balance for purchases. Credit card companies use different methods to calculate the balance on which the finance charge will be based. One such method is the "average daily balance" method. This generally means that the balance is figured by adding the outstanding balance (including new purchases) for each day in the billing cycle, and then dividing by the number of days in the billing cycle.

Annual fees. Some credit card companies charge you a flat fee (in addition to interest and other charges) for using their card. Some do not. If you pay off your balance each month, you want a card without an annual fee. If you carry a balance, a card with an annual fee but a low interest rate may be better than a card with no annual fee but a high interest rate.

Transaction fees. The company must disclose any fee that is imposed for using the card to make purchases, balance transfers, or cash advances.

Other fees. Most credit card companies charge penalties for late payments or going over your credit limit. Check the fine print to see how high these charges can go.

Higher interest rates for cash advances and late payments. Virtually all credit cards charge higher interest rates for cash advances. And, with some cards, if you make late payments, the company imposes a new, much higher interest rate. If you think you might pay late once in a while (be realistic), check out these interest rates. Some exceed 20%.

Also, you should be aware that many credit card companies today will charge you a higher interest rate if you default on an obligation to another creditor. Many companies review their customers' credit reports regularly to identify risky cardholders. If this review makes the company feel insecure, it may raise your interest rate even though you have never made a late payment to it.

Rebates, free miles, and other perks. Many credit cards now allow you to earn cash back, free airline miles, discounts on goods and services, funds for charity, or other bonuses by using the card. Don't sign up for a card based on these perks alone -- be sure to consider the other card terms as well. If you will pay high interest and high annual fees, you might be better off without the perks. You can use the money you save to buy airline tickets.

Changed Terms

In most states, credit card companies can change the terms of your card holder agreement with as little as 15 days' notice. Read the inserts that come with each credit card statement. If you don't like the changed terms, it's time to shop around again or call the credit card company. Tell them you plan to cancel your card unless it can give you a better rate or lower or no annual fees. Believe it or not, many credit card companies will comply with your request rather then lose your business. It's worth a shot.

Good Credit Card Deals

There are thousands of banks, credit unions, and other organizations that offer credit cards. Here are a few ideas on where to start your shopping:

  • Your credit union. Credit unions often have the best rates.
  • The Internet. Use the Internet to do comparison shopping. Many banks advertise credit cards on the Web. And some websites provide credit card comparisons. Try www.bankrate.com, www.cardweb.com, or www.consumer-action.org.
  • Professional organizations and universities. Many professional organizations and universities offer credit cards with low interest rates and no annual fees to members or alumni.

Contact Us