The most important consideration when choosing a credit card is the price. Two major items make up the price of the card. One is the interest rate (usually called the “annual percentage rate” or APR), and the other is the annual fee. But other fees can add up, too.
Study the fees
Before selecting a credit card, learn which credit terms and conditions apply. Each affects the overall cost of the credit you will be using. Consider these costs:
Many credit issuers charge an annual membership fee. These fees vary quite a bit, ranging from $10 to $75 or more. Remember that not all cards charge an annual fee.
Annual percentage rate
The annual percentage rate or APR is disclosed to you when you open the account and is noted on each bill you received. It is a measure of the cost of credit expressed as a yearly rate. The card issuer also must disclose the “periodic rate.” This tells you how the credit issuer figures the finance charges in for each billing period.
To get the lowest price, look at both annual fees and interest rates. Ideally, you will get a card with no annual fee and low interest rates. More realistically, look for a card with the best combination for you.
For example, if you pay your balance off every month, look for a card with no annual fee. If you make full payment within the grace period each month, you will not be charged interest, so you do not need to be as concerned about APR.
If you regularly carry a balance, you will pay interest and finance charges. In this case, you should look for a card with a low interest rate, even if it means paying an annual fee.
A word of warning: Most new credit card users plan to always pay off their balance each month, so they don’t worry about the APR on their card. Down the road, many of these same people find they don’t always pay off their balance in full each month. So, it pays to consider the APR up front, in case you turn into a typical credit card user.
Also called a “free period,” this allows you to avoid finance charges completely by paying your balance in full before the “due date” shown on your bill. If your credit card plan allows a grace period, the card issuers must mail your bill at least 21 days before your payment is due. This is to ensure that you have enough time to make your payment by the due date.
The catch is that if you carry an outstanding balance from one month to the next, you lose your grace period. In this case, most cards charge interest immediately on all new purchases that you make.
Transaction fees and other charges
Credit card issuers charge other fees, too. For example, some card issuers charge a fee when you use the card to obtain a cash advance, when you are late making your payment, or when you go over your credit limit. Others charge a flat monthly fee whether or not you use the card. If you end up paying these fees regularly, you can wipe out any savings you gained from a card with no annual fee or a low interest rate.
How are the finance charges figured?
If you usually have an outstanding balance on your card, it is important to understand how finance charges are computed. The method used can make a difference in how much interest you pay. The three main ways card issuers figure charges are:
Average daily balances
The company averages your daily balance. For instance, if you charged $100 on the first day of June and charged an additional $200 on the 16th, your average daily balance would be $200. That number times roughly one-twelfth of your annual percentage rate, or APR, equals your monthly finance charge. Interest may be calculated on a daily or monthly basis.
A credit card practice where the consumer is charged interest on debt already paid. Here’s how it works: A cardholder begins a billing cycle with a zero balance and charges $500 on a credit card. They make an on-time payment of $450. With double-cycle billing, they would be charged interest on the whole $500 — instead of the $50 still owed — in the next billing cycle.
The bill will show the beginning balance and ending balance for your account. The finance charge is based on the outstanding balance at the beginning of the billing cycle.
I hope this column has removed some of the mystery of the cost of credit.
Shawna Frazier, a realtor for Re/Max Results, has had a successful full-time real estate business for the past 12 years. Her goal in the coming weeks is to share information of value to MSR readers that will include tips on selling, buying, investing, and restoring your credit. She welcomes reader responses to [email protected].