8 ways to compare credit cards
By Ben Woolsey and Emily Starbuck Gerson
Not all credit cards are created equal, and comparing credit card offers can be challenging. What is best for one person may not be best for another, so it is important to weigh a multitude of factors, including interest rate, fees, rewards programs and member benefits.
Brad Stroh, co-CEO of Bills.com, breaks down some of the most important factors one should look for and compare in a credit card offer.
1. Type of card
Credit cards have many variations, but they fall into three major classes.
- Secured cards require a security deposit and are for those who have no credit or bad credit.
- Regular cards do not require a security deposit but have few features. They have higher credit limits than secured cards but lower limits than premium cards.
- Premium cards (gold, platinum, titanium) offer higher credit limits and usually have extra features such as travel insurance or emergency service.
2. Grace period
This is the number of days you have to pay your bill in full without triggering a finance charge.
3. How the finance charge is calculated
This is the dollar amount you pay to use credit, and it depends in part on your outstanding balance and the annual percentage rate (APR). Companies use various methods to calculate your outstanding balance, and the method can make a big difference in the finance charge. Your outstanding balance may be calculated over one or two billing cycles; including or excluding new purchases in the balance and by using the adjusted balance, average daily balance or previous balance. Know if the card has a minimum finance charge.
Some cards have annual fees, over-the-limit fees, late payment fees, foreign transaction fees, balance transfer fees and more. Pay attention to the fine print.
5. Cash advance features
Most cash advances carry a much higher interest rate than regular purchases. If you plan to use cash advances, look for information about access (ATM, "checks," APR, fees, limits and how payments are credited).
6. Credit limit
Your personal credit limit will be determined by your credit history, but some cards come with a preset credit limit.
7. Incentives and reward programs
Rewards cards can include cash rebates on purchases, online account access, frequent flier miles, additional warranty coverage, car rental insurance, travel discounts, concierge services and more. If you have no credit or bad credit, you may have to work on building good credit before you are approved for a card with rewards and incentives.
8. Interest rate
Interest rates will be described in the credit card offer as fixed or variable, although in practice, there is not as much difference as the names imply. Variable rate cards will have their APRs pegged to an index -- most commonly the prime rate -- and will go up and down as short-term rates change in the larger economy. You may think you avoid the interest rate risk with a fixed rate card, but you won't. Federal law allows card issuers to change any terms of the card, including its rate, with just 15 days' notice.
If you are the type of person who pays your entire credit card balance each month on time, Stroh says, "A low interest rate credit card is not as important as one with no annual fee or and a longer grace period."
Unfortunately, many people are not so disciplined about paying off their credit cards in full and on time every month. If you occasionally or often carry a balance on your credit cards, a low interest credit card may be best for you. The difference between a low 10 percent APR interest rate and a higher 20 percent APR interest rate is significant over time. Just remember that some cards have an introductory 0 percent APR for several months to a year, then jump to higher APRs. If you have large purchases to make, it is wisest to pay them off during the time in which your introductory APR is still active.
If you plan to use the card for cash advances, look for a card with a lower APR and low fees on cash advances, since APR for that type of transaction can be quite high. "Understand that a single credit card may have several APRs," Stroh says. "They include APRs for purchases, for cash advances, for balance transfers, penalty APRs for late payments, introductory APRs, delayed APRs, which come in after the introductory rate expires, fixed versus variable APR and tired APRs, which happen when different rates are applied to different levels of the outstanding balance."
When determining what the best credit card is for you, remember that credit cards all have unique terms and conditions, which should be scrutinized and compared before you fill out an application.
To comment on this story, write to Editors@CreditCards.com.
Published: November 1, 2007