Shopping for Credit Cards

Before signing up for a credit card, learn about the key terms in the credit card agreement, and shop around for the best deal.

If you are in the market for a credit card, you can save yourself lots of money by shopping around. Credit card terms and interest rates vary -- and some of those variations can make a huge difference to your wallet. Before you sign up for a new card, make sure you understand the important terms of the credit card agreement. Then shop for the card with the best interest rate and terms. And, if you didn't shop around for your current card, you would be wise to do some comparison shopping now. You may find a better deal elsewhere.

The Important Terms in a Credit Card Agreement

The federal Truth in Lending Act requires credit card companies to disclose the terms of the credit card in the card holder agreement (that piece of paper with lots of fine print that comes with the application). The interest rate is a good start for comparison shopping. But don't ignore other terms -- they can cost you hundreds or thousands of dollars as well, depending on how you use your card. Here are the basic elements in a credit card agreement and what you should look for in each one:

  • Finance Charges (also called "interest"). Credit card companies disclose the interest rate in several ways, but you want to look at the Annual Percentage Rate (APR). This is the amount of interest, transaction fees and other charges that you will pay per year, expressed as a percentage. Although the APR is an estimate (it will vary a bit depending on how many transaction fees you incur and how large a balance you carry), federal law requires that it be calculated in a standard way. It is the best indicator of the actual interest you will pay.

    If you never carry a balance on your credit card, then the APR is not important. You won't ever pay interest. But, if you don't pay your bill in full each month, the APR is crucial. Obviously, the lower the APR, the better. But, be sure to read the fine print. Some cards have a low "introductory rate" (also called a "teaser rate"). After a few months, the interest rate will skyrocket. Also, sometimes the advertised rate only applies to certain people, such as those earning a high income. The card company charges a much higher rate to those who don't qualify -- which could mean an unpleasant surprise when your first bill arrives.

  • Grace Period. This is the interest-free period of time between the purchase date and the bill due date. It is usually available only to those who do not carry a balance. If you pay your bill in full each month, make sure you have a grace period. Otherwise, you'll pay interest from the date of your purchase. If you carry a balance, a grace period is not important.

  • Annual Fees. Some credit card companies charge you a flat fee (in addition to interest and other charges) for using their card. Some do not. If you pay off your balance each month, you want a card without an annual fee. If you carry a balance, a card with an annual fee but a low interest rate may be better than a card with no annual fee but a high interest rate.

  • Transaction Fees. Most credit card companies also charge fees for cash advances and assess penalties if you pay the bill late or go over your credit limit. Check the fine print to see how high these charges can go.

  • Higher Interest Rates for Cash Advances and Late Payments. Virtually all credit cards charge higher interest rates for cash advances. And, with some cards, if you make late payments, the company imposes a new, much higher interest rate. If you think you might pay late once in a while (be realistic), check out these interest rates. Some exceed 20%.

  • Rebates, Free Miles and Other Perks. Many credit cards now allow you to earn cash back, free airline miles, discounts on goods and services, funds for charity or other bonuses by using the card. Don't sign up for a card based on these perks alone -- be sure to consider the other card terms as well. If you will pay high interest and high annual fees, you might be better off without the perks. You can use the money you save to buy airline tickets or contribute to your favorite charity.

The Terms of Your Agreement Can Change

In most states, credit card companies can change the terms of your card holder agreement with as little as 15 days' notice. Read the inserts that come with each credit card statement. If you don't the like the changed terms, it's time to shop around again or call the credit card company

Where Can I Find Good Credit Card Deals?

There are thousands of banks, credit unions and other organizations that offer credit cards. Here are a few ideas on where to start your shopping:

  • Your Credit Union. Credit unions often have the best rates.
  • The Internet. Use the Internet to do comparison shopping. Many banks advertise credit cards on the Web. And some websites provide credit card comparisons. Try http://www.bankrate.com, http://www.cardtrack.com or http://www.consumer-action.org.
  • Professional Organizations and Universities. Many professional organizations and universities offer credit cards with low interest rates and no annual fees to members or alumni.
Ask Your Credit Card Company to Reduce Your Interest Rate or Annual Fee
If you have a credit card but can get a better deal elsewhere, call your current credit card company. Tell them you plan to cancel your card unless it can give you a better rate or lower or no annual fees. Believe it or not, many credit card companies will comply with your request rather then lose your business. It's worth a shot.

Copyright 2004 Nolo