The Idiot's Guide to Selecting a Credit Card

Summary: There are literally hundreds - possibly thousands - of credit card offers available to consumers these days. So how do you choose the best one?

There are literally hundreds - possibly thousands - of credit card offers available to consumers these days. So how do you choose the best one? What should you look for in a credit card? How can you be sure that you won't get stuck with high interest rates or a rewards program that doesn't exactly live up to your expectations? In this article, we'll take your through the major elements of a credit card so that you know what to look for and can make an informed decision about which credit card to choose. Interest Rate The first thing that most people look for is the interest rate. Also known as APR (annual percentage rate), this is essentially a percentage that is charged to you, the consumer, if you do not pay your credit card bills on time. APRs change frequently, but once you apply for and receive a credit card you will have that rate for the life of the card. If you can, it's always best to pay your credit card bills in full every month - this way, the interest rate becomes a moot point and you only pay for what you charged on your card, nothing extra. Watch out! Interest rates on credit cards can cause severe debt problems if you don't manage your bills and pay them on time. Some credit cards will charge you interest on your entire monthly balance, even if some or most of it was paid off. Make sure to pay your credit card bills on time every month if you are able to avoid going into credit card debt. Introductory Rates While we're on the subject of interest rates - one thing to look for is the introductory rate of a credit card offer. A large percentage of credit card issuers will offer incentives to apply for their cards - which is great news for consumers. You'll usually see introductory offers of between 6 and 12 months of either low or even 0% interest rates. This means that for the first 6-12 months of the life of your card, if you don't pay off your credit card bill every month, you will not get charged interest for any outstanding balances. Who would this be particularly beneficial to? If you are making a large purchase, having a credit card that offers 0% interest for 6-12 months would allow you to manage payments on that item without paying extra. Balance Transfers Credit cards allow you to transfer balances from other cards or accounts onto your new card. This can be especially beneficial to consumers if you have an existing credit card with a large balance and are paying high interest rates on it. By choosing a new credit card with an introductory offer of 0% interest, you can buy yourself time to pay off that balance without paying interest on it anymore. When you're comparing credit card offers, though, make sure you read the fine print regarding balance transfers. Look for any rates, minimum or maximum amounts and also time frames that might apply to using this technique to lower your payments. Default Interest Rates On your credit card application, you might notice a different (usually higher) rate of interest called the default rate. This is the rate of interest charged when you default on your loan - meaning you do not pay back the balance on your credit card. Credit cards are essentially loans that you take out each time you use your card. You are borrowing money from your credit card issuer to purchase goods and services. If you do not pay them back this money, you've defaulted, and will be charged higher interest rates until you do. Cash Advances Some credit cards will allow you to take cash out of your credit account for spending instead of using the card as your purchasing medium. There are usually limits to how much cash you can take out and you should watch out for the rates that credit cards charge to take this cash out (through a bank, ATM, or by check). When you can, it's best to just use your credit card to make purchases. Other Fees You'll want to make sure to read the fine print in any credit card that you apply for, but we'll clue you in on some of the typical fees that you'll likely be confronted with in choosing a credit card. Application Fee - some credit cards charge you a one time fee for applying and receiving their credit card. Late Fees - there is usually a fee that the credit card company will charge you if you are late in your payments. This can be in addition to the interest rate that you are charged on outstanding balances. Annual Fees - some credit cards, often times rewards credit cards - have an annual fee that is automatically collected (I.e. charged to your credit card) every year. When you're applying for a credit card, make sure that the fees associated with the card are either low or manageable within your own personal financial budget. Grace Period The grace period offered by a credit card issuer is the time that they allow you to pay back your balance. You'll typically find grace periods of 20-25 days. This means that once your monthly billing cycle has ended, you have 20-25 days to pay your credit card bill. Due dates are always noted on your statements. Credit Limits When you apply for a credit card, you'll be given a credit limit. This is a ceiling, or a maximum amount of money that your credit card issuer will allow you to spend using that credit card. Your credit limit is usually based on your personal credit history, so it's always a good idea to check out your credit before you apply to make sure you don't have any mistakes on your credit report. After having a credit card for a longer period of time, your credit limit may be adjusted (either automatically or by request) depending on your history of paying that credit card off. Conclusion The terms discussed here are the main things that consumers will want to watch for when selecting a credit card. Credit card debt has soared over the course of time and consumers find themselves owing much more money than they had intended - but that can be avoided by simply reading the fine print with each credit card application. More importantly, if you pay your credit card bill every month in full, you shouldn't have to worry about credit card debt at all.