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How to Choose A Credit Card With An Informed Approach
If you're like me you can't go to the grocery store without getting a credit card offer. I finally decided that I am in the market for a new credit card and I am about to begin navigating through the offers. In the past I haven't really looked over the choices very carefully; I was younger then and the terms all looked the same. In fact, I was even guilty of choosing a card based strictly on the design; and let me tell you it paid off. I got compliments on it every time I used it.
This time I am going to use a more informed approach. I am older and wiser and have come to better understand the long term effects that choosing the wrong card can have. At this stage in my life I don't necessarily pay off my credit card balance each month, so for me, a low Annual Percentage Rate (APR) is important. The perks that a lot of cards offer like travel points, cash back, airline miles, etc. are nice but the APR determines how much it will actually cost me to use the card. As I age and become more financially solid my focus may shift more towards perks but for now I am focused on cost of ownership.
I also need to take note of the difference in APRs for my transactions. Is the APR the same for balance transfers, purchases, and cash advances? In most cases it is different.
The monthly finance charges (the percentage determined by dividing the APR by 12 months) can be calculated in different ways by different companies and there are three basic ways. The most common method is the Average Daily Balance method. Monthly finance charges are billed based on the average balance over the previous month. So for example, I have a credit card balance of $1000 and make a payment on the 15th of $600. My average daily balance is $700. If my APR is 12% then my monthly finance charge would be 1% of $700 or $7.
The Adjusted Balance Method figures finance charges at the end of the billing period after all charges and credits have been billed. This means, if I have the same $1000 balance and make a $600 payment I am going to be billed finance charges on my $400 balance or $4. While the most expensive Previous Balance method will bill my finance charges based on my balance last month. Any charges or credits will be applied to my next bill. So I will be billed $10 in finance charges on my $1000 balance and will get credit for my $600 payment in the next month's calculations.
Because I don't pay my balance in full each month, this is especially important to me and can save me hundreds of dollars on a credit card offer that otherwise looks identical.
After I have looked over the APR and how finance charges are calculated, I am going to look at the other fees. Annual fees, over limit, late payment, returned check and even if the company will charge me to make a payment over the phone. I take the time to shop around for everything from a car to the best deal on laundry detergent so it is well worth the little bit of time that it will take me to really look over these offers. Then in the end, after I have evaluated all of the offers and narrowed my choices, I will choose the one with the puppy. After all, I'm not dead inside.