Like dandelions in a spring lawn, credit card offers pop up everywhere — stuffing your mailbox, flashing on the internet and falling out of magazines. They all sound so attractive: "0% APR until next year!" "No fee if you transfer a balance now!" "Low fixed rate!" You're thinking of applying for a card, but how do you decide which offer is best for you?
First, you need to understand what a credit card is and how it’s different from a debit card. Next, you can evaluate the offers and decide which card is right for you.
Ask yourself these questions when choosing a credit card
- What's the APR or interest rate?
- Is it fixed or variable? If variable, how is it calculated?
- Will you be charged different interest rates for purchases, balance transfers, and cash advances? Which one(s) of these will you actually use?
- What method determines the outstanding balance used to calculate the finance charge?
- Is there an annual fee, and what other fees may be charged? If there’s an annual fee, what benefits offset this fee?
- If you travel overseas, are there foreign transaction fees?
- What's the length of the grace period (if any)? Most cards today have at least a 30-day grace period.
What else to look for in finding the best credit card
Once you’ve answered the questions above to see how this card will fit (or won’t fit) into your financial life, you need to think about how you'll use the card. If you intend to pay off the balance each month and won't incur any finance charges, obtaining a low interest rate is less important than finding a card with no annual fee, minimal transaction fees, and a long grace period. If you'll carry a balance from month to month, you'll want a low interest rate and a balance calculation method that minimizes your finance charges.
If you’re going to do a balance transfer
Perhaps you're not currently using your credit card, but you want to minimize the finance charge on your existing balance. One way to do so is to transfer your balance periodically to a new card with a low introductory "teaser" rate of interest. If you choose to "surf" in this fashion, be cautious. Watch out for:
- A low interest rate on new purchases, but a higher interest rate on balance transfers
- A low introductory interest rate that applies only for a very short period of time
- Balance transfer fees, particularly uncapped amounts calculated as a percentage of the balance transferred – the good news is that Patelco does not charge balance transfer fees
- Termination fees and retroactive interest charges levied if you decide to surf the next wave and close the account or transfer the balance to another card before a specified time period has elapsed
When you transfer a balance from an existing card to a new one, it's a good idea to close the account you're leaving. By doing so, you won't be tempted to use the card again (at a higher rate of interest once the introductory offer period has expired), and you'll minimize the potential for fraudulent use or identity theft. What's more, if you don't close such accounts and later try to transfer your balance again, a new card issuer might turn down your application, afraid you'll incur too much debt by running up new balances on dormant, but open, credit card accounts.
Source: Broadridge Financial Solutions, accessed October 22, 2019.