How to Choose the Right Credit Card – Part 3

Click to read…

Part 1Uses of Credit Cards, Finding the best rates, Different Types of Rates.

Part 2Credit Card Fees, Credit Limits, Grace Periods

Interest Charges Calculations

Current account balance and the interest rate are the two primary factors typically used to determine the amount of your Interest Charges every month.

The balance may be calculated in 3 different ways.

  1. Calculated over 1 to 2 billing cycles.
  2. Calculated using the adjusted balance, average daily balance or the previous balance.
  3. Calculations may or may not include recent purchases within the current grace period.

Typically the lowest interest charges will accrue with the 1 cycle, with no recent purchases included is the calculation used.

Minimum Finance Charges

Most credit companies have minimum finance charges.  For example if you owe only $50, the calculated interest charge is $2, but the minimum charge is $5, you will pay $5.  The extra will be applied to the principle balance on the account.

Using The Cash Advance Feature

Some credit cards have a cash advance feature.  This allows you to pull cash out from the credit card, and your balance will increase in the amount of cash you withdraw. Cash advances can usually be accessed from ATM machines or the credit company will send you checks in which you use to get cash.

When using this feature there are a few things you need to know. Most credit card companies treat cash advances differently then regular purchases.  They may have different rates and fees.  Keep in mind these things when using a cash advance.

  • The Interest Rate is Usually Higher for Cash Advances.
  • There are usually fees associated with cash advances.
  • There are typically limits to the amount of cash you can withdraw.  A percentage of the balance or a fixed amount will determine the maximum cash advance you can receive.
  • Sometimes your monthly payments will apply first to standard purchases until they are paid off.  At that point payments will be applied to cash advance money.  Since the interest is usually higher on cash advances this means the credit company can collect more interest charges on the cash advance money.  This is why they do not pay that money off first.  Often times you can request to have extra payments applied to the cash advances.

Use the cash advance feature with caution. Read the terms of service regarding cash advances before you ever use the feature.  After fees and higher interest cash advances can be pretty expensive.

Standard, Secure and Premium Credit Cards

  • Standard Credit Cards – A standard credit card is what most people qualify for.  There are usually no extra special features, and do not typically have annual fees.  The high credit limit is usually not as high as the premium cards, but can be increased with good credit history.
  • Secure Credit Cards – Secure credit cards are normally for people with bad credit, no credit or people that are trying to rebuild their credit.  Secure credit cards require a security deposit, the amount of which will help determine the high credit limit.  The more the security deposit the higher the credit limit.
  • Premium Credit Cards – Premium credit cards often have annual fees, but come with all the bells and whistles.  They usually have warranties, protection, traveler bonuses and many more.  Usually the premium credit cards have the highest credit limits.

Credit Cards Special Features

Credit cards, especially the premium cards discussed above, can come with special features to benefit customers and entice borrowers to use the credit card more.  Although there are hundreds of different features out there, here are a few of the more common features you will see.

  • Air Miles – Credit cards often offer air miles for every dollar spent, which can be redeemed for airline tickets to fly around the world.  Usually for every $1 spent you receive 1 mile.  Some cards or certain usages of cards will give you 2 miles for every dollar spent.  For example a credit card from a specific airline will offer you double the miles if you purchase your airline ticket through them, using their card.
  • Rebates - Rebates are a popular feature.  You can receive money back for every purchase you make.
  • Warranties - Credit card warranties will help protect the purchases you make using the credit card.
  • Rental Car Benefits - Many credit companies will provide rental car insurance or special offers, like upgrades, if you use their card to rent the car.
  • Travel Insurance – Protect your travels with insurance from some credit cards.

There are some other credit card features that can be purchased. These features are usually insurance type deals that will help pay your bill if you become unemployed.

Many of these features either cost money or come with cards that have annual fees.  Be sure you will use the features, otherwise you will just be throwing your money away.


How To Choose the Right Credit Card – Part 1

Choosing the right credit card for your needs is important and will save you money in fees and interest.  Not all credit cards are the same.  They have different rates, fees, benefits, features, points, ratings, limits, cash features and the list goes on and on.

Use these tips to help you pick the right credit card.

1. Determine how you will use your Credit Card

Yes there are different ways to use a credit card. Here are a few of the more common ways to use a credit card and the benefits of each.

  • Purchasing an item and paying only the  minimum payment.  This usage of a credit card is typically discouraged. If you only pay the minimum payment, you will carry a balance from month to month and be charged an interest fee.  Even if you pay extra every month, but still carry a balance to the following month you will be charged interest on the balance.  If you anticipate this action on your credit card you will want a card with a low interest rate.
  • If you plan to use your credit card and pay the total balance off before the end of the month, rate will not be as big of a factor.  Look for a card with a longer grace period and one that has no annual fees.
  • If you plan to take cash advances on your credit card you will want to find a card with little or no cash advance fees.  Also keep in mind the interest rate on cash advances.  Often times money taken on a cash advance will accrue higher interest credit used for a standard purchase.
  • Collection of Miles and Reward Points is common use for credit cards.  Often times people combine this technique with paying off the total balance every month.  Selecting a few common purchases like grocieries and gasoline will help build points and miles quicker.  Remember miles or points credit cards typically have annual fees, and cash advances do not usually accrue miles.

2. Finding the Best Interest Rates

The interest rate on a credit card is stated as the APR or Annual Percentage Rate.  The interest rate will determine the interest accrued for cash advances, transfers and balances carried from month to month.

Credit cards can carry different rates for many different aspects of the borrowing process.  Here are some of the APRs you may encounter with a credit card.

  • Introductory Rates: Credit Cards will often times offer a lower rate for purchases made within the introductory period of the card.  The Introductory period lasts from the time you open the card until the introductory term expires per the contract.  Many times the introductory rate will be 0% or close to that in order to entice you to borrow or transfer money immediatley after opening the credit card.
  • Purchases, Cash Advance and Transfers: Credit cards may have different rates for common purchases, cash advances and transfers from other credit cards.  Most of the time the cash advance and balance transfers will have higher interest rates then standard purchases.
  • Balance Rates: Credit Cards may charge different interest rates depending on the balance of your credit card.  For example: If you have a balance of $1-$500 you may have a rate of 13%. And for a balance over $500 your rate may increase to 15%.
  • Penalty Rate: A penalty rate will typically occur when you have been late on a monthly payment.  Penalty rates are usually very high.  For example, your rate may be a 14%, but if you miss a payment or miss a few payments within a certain time frame your penalty rate of 28% may now apply.
  • Post Dated APR: You will see these usually as special offers.  A credit company may offer no interest for 6 months, or no interest until a certain date.  Be sure to know what the interest will be after the special offer expires.  Note: Most of the time if you do not have the balance paid off before interest starts accruing the credit card company will charge interested based on either the original balance or current balance, which ever is HIGHER.  That means if you started out with a $2,000 purchase, have paid it down to $300, but your no interest time frame expires they can charge interest on the $2,000.

Fixed and Variable Credit Card Rates

A fixed rate credit card does not necessarily mean that the rate will be fixed the entire time you have the account open.  It will remain fixed, but if the credit card company changes the rate they are required by law to notify you of the change.

The Variable rate credit cards are usually based on other financial market information.  Most follow the prime rate, and if the prime rate moves up or down your credit card rate will follow.

(To Continue Reading Click How to Choose the Right Credit Card Part – 2. Learn about fees, credit limits and your grace period.)