What to Look for When Choosing a Credit Card?

Whether it's your first credit card or you are already a cardholder, you should have a few items on your checklist when signing up for a new credit card. You should understand all fees that come with it and what your future credit card will offer. Let's go over what to look for when choosing a credit card and how to pick the right one.

Interest Rate

The annual percentage rate (APR) is the interest rate you pay on the balance you carry on your account. Although the APR represents the cost of credit per year, the interest accrues daily, and payments are due monthly.

You can avoid paying credit card interest. If you pay your balance before the due date in full, you will not have to pay any interest. In other words, you have a 21-day interest-free grace period before the interest starts accruing on your balance.

You will lose the interest-free grace period if you pay only the minimum amount due but do not pay off your balance by the due date. Interest will start accruing daily from the statement closing date until the next due date, and the charges will be included in the following statement.

Let's say you paid only the minimum amount due in January, and you have a balance that carries over to the next billing cycle, which starts on February 1. Even though your payment isn't due until the end of February, interest will begin accruing every day between February 1 until you pay off the balance. Even if you pay off the balance by the end of February, the next statement in March will include the interest you have accrued on that balance in February.

Credit cards charge interest on balances you don't pay by the due date each month. When you carry a balance from month to month, interest is accrued daily, based on what's called the Daily Periodic Rate (DPR).

The Daily Periodic Rate (DPR) is calculated by dividing the annual percentage rate (APR) by all the days in the year. For example, if you have a credit card with a 22% APR, your daily comes out to about 0.06% per day (22 / 365 = 0.06).

Sign-Up Bonuses

Credit companies often offer sign-up bonuses to attract new customers. A sign-up bonus is a cash incentive for customers who open a new credit card. The bonus amount can range from tens of dollars to hundreds of dollars. Typically, you get a cash bonus after spending a certain amount of money in the first few months using your new credit card.

For example, a sign-up bonus can be a one-time $250 cash bonus after you spend $500 on purchases within the first three months from the time you open a credit card account.

Some people open credit cards for the sole purpose of earning sign-up bonuses and other benefits. This practice of repeatedly opening and closing credit cards to earn bonuses is called credit card churning. Be aware that a repeating pattern of opening and closing credit cards is often a red flag for card issuers and can temporarily lower your credit score.

Introductory Rates

Another way credit card issuers attract new customers is by offering a low-interest rate or even a 0% interest rate for a specific time. A 0% introductory APR means you won't pay any interest on your credit card balance for some time, even if you carry a balance from month to month. These introductory APR periods commonly last for 6 to 12 months, but some may be as long as 18 months.

Be aware that the APR will increase to the regular rate once the promotional period is over. Read the credit card agreement to learn about the APR after the promotional period.

If you are looking for a credit card to help with your ongoing expenses, consider a card with a low-interest rate that doesn't require an annual fee.

Fees

In addition to the annual percentage rate (APR), credit cards come with variety of fees. Here are the most common ones:

Annual Fee

An annual credit card fee is typically a one-time fee charged yearly to your account. You can think of an annual fee as a subscription charge. Credit cards with annual fees usually provide some benefits that no-annual-fee cards do not. This benefit may be in the form of travel insurance, increased cash back on purchases, airline miles bonus, or some other perks.

If you are looking for a credit card that gives you the best rewards, its annual fee may be worthwhile. Otherwise, you should consider other cards that don't charge an annual fee. If you don't want to pay the annual fee, ensure the credit card you apply for doesn't come with it. Many no-annual-fee credit cards come with a variety of perks and benefits as well.

Late Fees

Credit card issuers charge late fees when you miss a payment on a credit card. You should know the amount of the late fee, but you should never miss a payment on your credit card bills.

Missing payments will hurt your credit score, which can be much more costly in the long run than paying a late fee. When choosing a credit card, a late fee amount is not a deciding factor if you understand that avoiding missing payments at all costs is a must.

Balance Transfer Fee

A balance transfer fee is a service fee to transfer the balance from one credit card to another. A balance transfer charge can be a flat fee or a percentage of the transferred balance.

The balance transfer fee may be the most important criterion if you plan to open a new credit card to manage your existing debt by moving high-interest debt to another credit card with a lower interest rate or a card with a 0% introductory APR.

Cash Advance Fee

A cash advance fee is a charge by the credit card issuer for using a credit card to withdraw cash. In addition to transaction fees, cash advances generally have a much higher annual percentage rate (APR), which makes them an expensive way of borrowing money. Cash advances should be the last resort when you have a financial emergency and don't have other options.

Expedited Payment Fee

Some cards offer an option to process your credit card payment faster (for example, if you are trying to avoid a late fee) and may charge extra for this service.

Returned Check Fee

A returned check fee is a fee you pay to the credit card issuer when you write a personal check for payment and the check is rejected because your account doesn't have sufficient funds.

Rewards

Some cards may offer a reward program. These cards are called rewards credit cards. Purchases with these rewards credit cards earn you cash back or points you can then spend on merchandise, gift cards, buying airline tickets and travel insurance, or paying down your balance.

Some people don't need to borrow money and open rewards credit cards to get their perks. If you don't need to take credit but want to reap the benefits of a rewards credit card - this may be the most important aspect of your future credit card.

Use Credit Cards Responsibly

Credit cards are not only a convenient way to make purchases. Credit cards can help you build your credit history and can help in emergencies. But irresponsible use of credit cards can harm your credit score and lead to a debt trap. Knowing how to use credit cards responsibly is a crucial part of financial literacy. Here are some tips.

1. When you apply for a new credit card, read the credit card agreement to learn about due dates, fees, interest rates, rewards, and other information.

2. Make your credit payments on time. Missed and late credit card payments will negatively impact your credit scores and will result in late fees and interest rate increases. Your payment history is the most important factor in calculating your credit scores.

3. Avoid credit card interest by paying your bill every month in full or by using introductory 0% APR promotions.

4. If need to borrow money and won't be unable to pay off the card balance each month in full, make sure you can afford at least the minimum monthly payment.

5. When you carry a balance on your credit card month to month, paying it down should be one of your top priorities. The interest is compounded daily and can add up quickly, leaving you with a considerably larger amount than you originally borrowed.

6. Don't use credit for the sake of earning rewards. Spending on what you don't need to get points or cash back isn't a good strategy. Overspending cancels out the monetary benefit of the rewards or may even result in debt that you wouldn't have otherwise. Rewards programs are only beneficial if you use them to make purchases you would have made anyways.