Originally published December 29, 2015
“Buy now, pay later” is the mantra that drives much of American holiday spending. Credit cards mixed with massive consumer spending are the cornerstone of the highly profitable credit card industry. Therefore it’s no surprise that banks continue to inundate consumers with credit card offers, especially during the shopping frenzy of the holiday season.
From the many varieties of Visa and MasterCard to Discover and American Express, credit cards are a common fixture in the wallets of millions of Americans. According to Forbes, “Federal Reserve credit card balances rose by $45 billion to a high of $1.03 trillion.” Credit card offers are mailbox staples, and — no surprise — the volume of unsolicited offers tends to increase the day after Thanksgiving.
Here’s some important information that will help you separate the good values from the rip-offs.
The Introductory Rate
The introductory rate, or “teaser rate,” expires after a designated period of time. Federal law requires introductory rates to remain in effect at least six months after sign-up. This rate is below market and typically applies only to balance transfers and cash advances, although it can also apply to purchases. Introductory rates are usually extremely low, ranging from 0% to 4% for up to 12 months. But be sure to read the fine print on when the initial rate will expire and what the percentage rate will be once the period ends.
Annual Percentage Rate: Fixed vs. Variable
If you don’t pay your balance in full by the due date, you’ll be charged interest on the remaining balance. How much interest you pay is determined by the annual percentage rate (APR) on the card.
If you pay the full balance on your credit card every month, you won’t have to pay any interest on your $0 balance and can ignore APRs. All credit cards have either a fixed or variable APR, determined largely by the “prime rate,” which is the interest rate commercial banks charge their most creditworthy customers. For example, if a bank is offering a credit card at “prime plus 4” and its prime rate is 5%, then the bank is essentially offering customers an 11% loan (4% + 5%).
A fixed APR locks in your rate so that it does not fluctuate with changes to the prime rate on which it is pegged. The variable APR, on the other hand, moves in step with the prime rate. If conditions are volatile and interest rates spike, the variable APR that originally enticed you can end up bearing little resemblance to what you actually pay. While it’s preferable to have a card with a fixed APR, these cards are few and far between. Currently, the average fixed APR is 13.1% and the average variable APR rate stood at 15.7%.
Cards for Bad Credit
Everyone deserves a second chance: That’s the reasoning behind credit cards targeting those with bad credit. Moreover, in today’s technologically driven world, it’s becoming increasingly difficult to function by only using cash, which makes a strong case for the ease and convenience of access to a credit card. Additionally, if you have bad credit but you rack up a good history with these types of cards, you can repair your damaged credit score.
In most cases, these types of credit cards are “secured,” which means users must first load money onto the card in order to access the credit via the card. Some companies offer “unsecured” credit cards with low credit limits and high interest rates. But be warned, these rates can be high—think at least 20 percent.
Rewards
Increasingly, credit cards are tied to charges for hotels, rental cars, air travel, grocery and gas purchases. The idea is that the more products and services you purchase, the more “points” you earn in return for free or discounted rewards, offering additional incentive to use the card again and again.
But beware: Many of these incentive-based cards come with high interest rates and
big annual fees. However, if their interest rates aren’t excessive and there aren’t a lot of hidden restrictions or fees, reward cards can be a good deal, offering free hotel rooms, bonus rental car use, free airline tickets, and more. Nonetheless, make sure it’s worth your while by casting a discriminating eye on the agreement and the fine print. For most frequent flyer credit cards, for example, you’ll see high interest rates, blackout dates, and restrictions for the privilege of getting miles in return. It’s not worth it and tantamount to paying for overvalued stocks.Evaluating the Key Areas
Know the interest rate and spend the time to compare fixed and variable APRs. If you think interest rates will remain stable, you might want to opt for the lower variable rate. But remember, that’s a risky choice. If interest rates go up, you lose and you’re stuck with the card. The good news is, thanks to the new credit card laws, card-issuing companies can’t raise rates on existing balances during the first year unless a prior promotional rate expired, the index on a variable index rate increased, or you were 60 days late in paying your bill. If your rate increase as a result of a late payment, the bank is required to restore it to its lower rate once you’ve made six consecutive monthly payments on time.
Be aware of your credit card’s annual fee, which can range from $15 to $300. Don’t agree to pay more than about $50. If possible, choose a card with no annual fee.
If you make a late payment, you will be charged a fee which could run you approximately $35. Avoid cards that impose over-the-limit charges and hidden fees for balance transfer and account termination. Some cards will notify you if you’ve gone over your limit without hitting your wallet with a penalty. Also, beware of fishy interest calculations. There are many ways a card issuer can calculate interest owed. One of the shadiest tricks is to use a late payment as a reason to jettison the interest-free period for new purchase transactions and then calculate the interest as far back as the original purchase date.
But the best way to safeguard against insidious fees is to be your own best advocate. Read the fine print on your credit card statement. If the contract allows the card company to get away with either of these schemes, cancel your card and find one that only charges interest from the date the new statement was produced.
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