Choosing a Credit Card

Smart consumer's comparison shop for credit, whether they're looking for a mortgage, an auto loan, or a credit card. Comparison-shopping is important because it could save you money.

When you're looking for a credit card, be sure to consider the costs and terms. They can make a difference in how much you pay for the privilege of borrowing. Compare them with the costs and terms of the cards you already have to find the plan that best fits your spending and repayment habits.

Key costs and terms to consider are the annual percentage rate (APR) for goods and services as well as for cash advances, the annual fee, and the grace period. Also compare cash-advance fees, late-payment charges, and over-the-limit fees.

Besides looking at these costs and terms, think about your typical bill-paying behavior. Do you pay your outstanding balance in full each month? Or do you usually carry over a balance? Matching the credit card plan to your needs could save money.

Credit Card Interest Rates

Credit card issuers offer variable-rate, fixed-rate, and tiered-rate plans. For variable-rate credit card plans, the interest rate is calculated according to a formula. Three of the most commonly used formulas are:

• Index  +  Margin = Variable rate
• Index  x  Multiple = Variable rate
• (Index  +  Margin)  x  Multiple = Variable rate

The most common indexes used by credit card issuers are the prime rate; the one-, three- and six-month Treasury bill rates; the federal funds rate; and the Federal Reserve discount rate. Most of the indexes are published in the money or business section of major newspapers. If the index rate used for your credit card changes, the rate on your card will, too.

The margin is a number of percentage points chosen by the credit card issuer. The card issuer also chooses the multiple.

The interest rate on a fixed-rate credit card plan, though not explicitly tied to changes in another interest rate, also can change over time. The card issuer must notify you before the "fixed" interest rate is changed.

A tiered interest rate means that different rates apply to different levels of the outstanding balance (for example, 16% on balances of $1 - $500; 17% on balances above $500).

Some card issuers may have a policy that raises your interest rate if you make late payments. For example, if you make 2 late payments within 6 months, the card issuer may raise your interest rate from 18% APR to 24% APR. If such a penalty rate applies to your card, the issuer must include a notice in the solicitation materials.

Card issuers may also charge different rates for different types of transactions. For example, the card may carry one rate for purchases of goods and services, another rate for cash advances, and still another rate for balance transfers.

How Much Will You Pay?

The finance charge—that is, the dollar amount you will pay to use credit—depends on your outstanding balance and the periodic rate in your credit card plan:

What Is the Outstanding Balance?

The outstanding balance can be calculated in several ways, and the method of calculation can make a big difference in the finance charge you will pay:

Average daily balance method including new purchases. The balance is the sum of the outstanding balances for every day in the billing cycle (including new purchases and deducting payments and credits) divided by the number of days in the billing cycle.

Average daily balance method excluding new purchases.The balance is the sum of the outstanding balances for every day in the billing cycle (excluding new purchases and deducting payments and credits) divided by the number of days in the billing cycle.

Two-cycle average daily balance method including new purchases.The balance is the sum of the average daily balances for two consecutive billing cycles. One daily balance, that for the current billing cycle, is calculated by summing the outstanding balances for every day in the billing cycle (including new purchases and deducting payments and credits) and dividing that total by the number of days in the billing cycle. The other daily balance is that from the preceding billing cycle.

Two-cycle average daily balance method excluding new purchases.The balance is the sum of the average daily balances for two consecutive billing cycles. One daily balance, that for the current billing cycle, is calculated by summing the outstanding balances for every day in the billing cycle (excluding new purchases and deducting payments and credits) and dividing that total by the number of days in the billing cycle. The other daily balance is that from the preceding billing cycle.

Adjusted balance method. The balance is the outstanding balance at the beginning of the billing cycle minus payments and credits made during the billing cycle.

Previous balance method. The balance is the outstanding balance at the beginning of the billing cycle.

Depending on the balance you carry and the timing of your purchases and payments, the average daily balance method excluding new purchases, the adjusted balance method, and the previous balance method tend to result in lower finance charges than the other balance-calculation methods.

What Is the Periodic Rate?

The periodic rate is the rate you are charged each billing period. Usually the periodic rate is the monthly interest rate, calculated by dividing the card's APR by 12. If your card has different rates for different types of transactions, then different periodic rates will apply to those balances. For example, if your card has a 12% APR on purchases, the periodic rate for purchases is 1%; and if your card has a 24% APR on cash advances, the periodic rate for cash advances is 2%.

To find out if debt settlement is right for you, fill out our FREE, no-obligation on-line form or call 866-865-6959 and get started on your new debt-free life!

Back to top