According to the advertisement, you need to think about “what’s in your wallet” when it comes to credit cards. Free flights, cash back and even a visit with Mickey and Minnie might be offered to you as perks when you use your credit cards, but hard numbers rather than the perks should determine which credit card you choose. Don’t be swayed by the bells and whistles and forget to check the basics that determine what that credit actually costs. When you get a new credit card offer, evaluate carefully and consider the following items.
What is the annual percentage rate (APR) on purchases? The credit card company may advertise a low rate, but you aren’t guaranteed this APR. When you apply, the company will evaluate your credit, and your rate may be higher if your credit is less than sterling. In addition, the offer may be for an introductory rate only, so find out what the rate will be after the introductory period is over. Remember that lower-rate credit cards often have fewer rewards, but their pay-off will be in lower costs. How do you plan to use your card? If you plan to pay it off each month, you won’t pay any interest, so it might be smarter to go with a higher-rate card that has more rewards. If you know you will carry a balance, go for the lower-rate card.
Will you be using the card for a cash advance or balance transfer? These transactions have a different rate (usually higher) and sometimes an additional fee. Look for a credit card that offers a 0 percent introductory APR for a certain amount time and work hard to pay the balance off before the introductory rate resets.
If you get a special cash advance or balance transfer interest rate, the remainder of your transactions go at the normal rate. When you make a payment, the payment gets applied to the lowest rate balance. The challenge is that the interest rate charges keep accruing at the higher rate while you are paying off the 0% rate balance. That’s why it is important that you avoid new charges if you are paying off a balance.
Some accounts have a variable interest rate. It will be stated as “6 percent over the prime interest rate.” In addition, it should state the date and where to look for the interest rate: for example, “APR published in the Wall Street Journal on the 11th of the month.” Knowing this information will allow you to know what you’ll be charged.
Check the default rate. If you go over your limit or miss a payment, what will the APR be? Some companies go as high as 30 percent for the default rate. Other cards have a generous policy that allows one or two late payments before the higher rate kicks in. Be sure to check the offer carefully.
Check the annual fees. Most of the cards with higher rewards, such as airline miles or cash back, have an annual fee. Make sure the benefits outweigh the cost of the fee. Also, you can request that the fee be waived.
Is there a minimum finance charge? If you pay your card off each month, this charge doesn’t matter. But carrying even a small balance may result in a hefty charge. A friend of mine left a balance of 50 cents on an account. She paid a minimum finance charge of $5 on the balance rather than the penny it should have been at a 13 percent rate.
Read the fine print. Sometimes there are some “gotchas” buried in the fine print of your agreement. Get out the magnifying glass or increase the font size on your computer until you can see everything. Some credit cards have wording that says they can raise your APR at any time, even without reason. Avoid cards that say “any time for any reason.” Also, some say they can raise your APR if you are late on other bills. If you pay any note late, you may find your interest rate going up on your credit card.
Carefully evaluate your credit card offers before you sign on the dotted line.
Roxie Rodgers Dinstel is associate director of Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at email@example.com or by calling 907-474-7201.