Financial Issues

Comparing Credit Cards

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Not all credit cards are created equal. You need to find a credit card that suits your needs. To do so, you will need to understand how credit cards differ. Credit card companies make their money by charging interest on the amount of money that you borrow at any given time, and by charging annual fees for the use of their credit card. Credit card interest rates will generally be expressed as an annual percentage rate (APR). This is the percentage of the amount you owe that you will pay to the bank as a fee. Since interest is express as a percentage, the more money you borrow, the more you will pay in interest. Additionally, the higher the interest rate, the more money you will have to pay and the greater the profit for the bank.

The interest rate and annual fees that lenders charge varies dramatically from company to company. So, you will need to comparison shop to find the credit card that offers you the lowest interest rate and charges the least in fees. Because competition for customer is fierce, many lenders use "teaser" introductory rates to lure in new cardholders. They will offer a 0% APR or a very low interest for a specified period of time. Sometimes this offer is valid for new purchases, balance transfers from another lender, or for both. After the introductory period ends, however, the interest rate will change to a much higher rate. These offers can be good for consumers, but only if they are used properly. Almost always written in the fine print of these offers is a penalty clause that gives lenders the right to take away the introductory APR if the cardholder makes even one late payment.

Another oft overlooked clause pertains to the calculation of interest charges after the introductory period ends. In most instances, the interest is calculated retroactively back to the date of the original purchase or balance transfer if the cardholder has not paid the entire balance in full. And, the financial institutions are very strict with their definition of "in full." Not even a single penny of the original balance can remain on the account or interest will be calculated as if the higher interest rate were on the account from the very beginning.

Even with these negative aspects, introductory teaser rates can be good because they allow cardholders to avoid paying a lot of money in interest. If cardholders are disciplined enough to not miss a payment during the introductory period and to make sure their balance is paid in full before the regular rate is applied, they can use these offers to their advantage.

Some credit cards offer cash back bonuses to users. They will credit back between 1% and 5% of purchases back to your account, in effect creating an instant discount on purchases. The catch to such cards is that they typically come with a hefty annual fee. Always keep in mind that cash back bonuses and similar perks are offered by credit card companies in order to entice people to use their credit cards. It is not at all helpful to you if you get 1% of your purchases back as a credit on your account, but end up incurring so much debt during the year that you owe more than the cash back bonus in interest! It takes a disciplined approach (paying debt off in full each month and on time) to make such bonuses work to your advantage.

 




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