How to Choose a Credit Card

Millions of credit cards are issued annually, and they can all be classified into three types of credit cards.

  1. Bank Cards (i.e. Visa, MasterCard, Discover)
  2. Store Cards (i.e. Macy's, Chevron)
  3. Travel and Entertainment Cards (i.e. American Express)

Say you are considering getting a credit card. What should you look for when choosing a card?

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  1. Annual Percentage Rate (APR)

When you open a credit card, there is an APR assigned to that card which is determined by your credit score, credit report, and the U.S. Prime Rate. The Prime Rate is used to set interest rates on loan products, like a credit card, and is used by major financial institutions. First, to come up with your credit card's APR, lenders look at the Prime Rate and then add some additional margins (interest) to ensure that they profit if you don't pay your balance. 

So, what is the prime rate? As of July 2022, the U.S. federal Prime Rate was 4.75%. So, for example, for borrowers with strong credit, the Prime Rate plus a lender's margin of 10% would equal 14.75%. For a borrower with poor credit, the Prime Rate plus a lender's margin of 20% would equal 24.75%. 

  1. Periodic Fees 

Pay attention to fees charged aside from regular purchases. Try to avoid annual fees, late fees, etc. 

  1. Credit Limit

Understand that your credit limit is based on both personal and institutional risk tolerance. Your credit card limit includes new purchases, balance transfers, and cash advances. 

  1. 21 Day Grace Period 

Look for a minimum of 21 days in a grace period before interest begins accruing. This typically stretches from the end of one billing period until your next payment is due. By looking at your credit card's terms and conditions, you can find out how long your grace period is. If there is no line stating how you can avoid paying interest, it could mean that you don't have a grace period. Also, keep in mind that only new purchases get a grace period. Cash advances and balance transfers start accumulating interest as soon as they hit your account. If you continue to carry a balance after your grace period ends, the issuer will apply the regular purchase APR to that entire balance.

  1. Travel Benefits 

In case you decide to travel, check if your credit card is accepted in that countryVISA and MasterCard are widely accepted worldwide. Make sure to let your credit card company know when you are traveling so they do not freeze your account due to suspicious activity thousands of miles away. Also, check to see if you are charged a fee for using your credit card abroad. This could be as little as 3%. Still, save yourself from this expense!

  1. Adjusted Balance Method

Look for cards that use adjusted balance method. This method has the lowest finance charges. The adjusted balance method uses the previous balance from the end of your last billing cycle and subtracts any payments and credits made during the current billing cycle. Differently, the average daily balance could cause you to be paying interest on your charges even if you payed off the entire balance before the end of the payment period.

  1. Age Requirement

To sign a credit card contract you need to be at least 18 years old. However, getting a credit card before the age of 21 is difficult unless you use a co-signer or have proof that you have a steady source of income to qualify for a credit card. 

 

It is so important that you keep your identity safe when providing personal and sensitive information - such as your legal full name, your address, and your social security number. Always make sure you are communicating with trusted financial institutions and watch for fraudulent transactions and offers. If you are asked by an unidentified party for information, do not respond to these inquiries. Instead, you decide which financial institution you want to pursue, and initiate the contact yourself!