Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, oneill@aesop.rutgers.edu
The best way to select a credit card is to match it to your intended use and bill-paying habits. Are you a “revolver?” Revolvers are credit card users who rarely, if ever, pay their credit card bills in full and, thus, pay finance charges each month to carry outstanding debt. If you plan to carry a balance from month to month, select a credit card with a permanently low-interest rate; i.e., not a “teaser rate” that quickly expires after a few months.
“Convenience users” are another type of credit card customer. These are people who pay their bills in full each month, thereby avoiding interest charges on new purchases when using credit cards with a grace period. For purchases that will be repaid in full the following month, the best credit card to use is one with no annual fee and a 20- or 25-day grace period. If the credit card also provides cash-back features or other valuable rewards, this is all the better.
When selecting a credit card, check information provided for marketing purposes and disclosures that are required under federal law. Marketing information is usually located prominently on the cover page of credit card brochures or on the first page of downloadable online credit card applications. This information is meant to entice consumers into applying for a particular credit card by highlighting attractive features and benefits. Below are some examples of marketing information that is frequently found in credit card offers:
- A low “introductory” or “promotional” APR (also known as a “teaser rate” because it does not last long). For example: “1.9% APR with balance transfers” or “5.9% APR for six months.”
- An advertised credit line, usually preceded by the words “credit line up to” or indicating a range of possible amounts. For example: “Maximum credit line up to $20,000” or “Credit line from $5,000 to $100,000.”
- A description of special offers, services, and privileges offered to cardholders. For example: “Year-end summary of charges” and “Earn 2% back on every purchase.”
- Application deadline date. Many credit card offers have stated expiration dates or deadlines by which an application must be returned. For example: “For balance transfers until April 1, 20xx.”
Next, take a look at the information that credit card companies are required to disclose under federal law. A disclosure chart (also known as a “Schumer Box,” named after the sponsor of the legislation) must include the following nine items:
- The actual annual percentage rate (APR) after the introductory rate expires. Example: “7.9% introductory rate for six months. Thereafter, 17.9%.”
- The APR formula if the interest rate is variable. Example: “The rate is determined by adding 8.4% (or 14.9% for the non-preferred rate) to the Prime Rate as published in The Wall Street Journal.”
- Length of the grace period. Example: “Not less than 25 days.”
- Amount of annual fee, if any. Example: “XYZ Airline Visa, $65 annual fee.”
- Minimum finance charge. Example: “$.50, if a finance charge is imposed.”
- Transaction fees. Example: “Transaction fee for purchases: None; Transaction fee for cash advances: 3% of each cash advance ($5 minimum); Balance transfer fee: 3% of the amount transferred.”
- Method of computing the balance for billing. Example: “Average daily balance (including new purchases)”
- Late payment fees. Example: “$25 late fee”
- Over-the-limit fees. Example: “$25 over-the-limit fee”
Policies vary among creditors, so it is important to read “the fine print.” Some credit card issuers charge a fee when cardholders don’t use their card a certain number of times within a specified period or if charges total less than a certain dollar amount. Transaction fees to transfer balances and to make cash advances are very common.
Some credit card issuers entice consumers to charge more with offers of gifts, charitable donations, and trial offers for products and services. Enhanced” credit cards with perks or “kickbacks” such as cash back rebates, product discounts, and frequent flyer miles need to be evaluated carefully. Often, the credit cards that offer these perks charge high APRs (interest rates) and/or fees. Unless a cardholder charges a lot and pays the balance in full monthly, they probably won’t benefit much from this type of credit card. The costs will simply exceed the benefits for most “revolvers.”
Affinity cards that make donations to charity, based upon the amount charged, must also be scrutinized carefully. Generally, the amount of the donation is small, such as a half of one percent (50 cents for every $100 charged). In addition, unlike a cash donation, indirect donations via a credit card are not tax-deductible. Some credit cards offer other enhancements such as purchase protection plans, collision damage waivers for car rentals, travel discounts, and extended warranties. Benefits such as these should not be the primary reason why a credit card is selected, however. Interest rates and fees are the most important factors. Credit card benefit policies are also subject to change. While benefits are often marketed with a great deal of fanfare to attract customers, they are often dropped very quietly.
When evaluating a credit card offer, scrutinize everything. This includes marketing information, mandatory disclosures (Schumer Box), and accompanying footnotes. Below is a worksheet to help you compare three credit card offers.
Credit Card Comparison Worksheet
Find three different credit card applications of the same type (e.g., bankcards, gas station cards, retail store cards).
Compare the three credit card offers by completing the chart below to describe key features of each credit card.
Decide which credit card is best for you based on their characteristics and your bill-paying habits. Look for a credit card with a non-teaser APR of 15% or less, a grace period of at least 25 days, no annual fee, and low fees.
Credit Card Feature Card #1 Card #2 Card #3
APR (annual percentage rate): Is it fixed or variable?
Penalty APR and trigger events when it is charged
Annual fee
Late fee
Over-the-limit fee
Transaction fees (balance transfers, cash advances, etc.)
Grace period
Method for computing account balance
Rewards for use
Other features