If you’re in the market for a credit card, there are a few things you need to know before you submit your application. Like, what’s the APR? and what does APR even mean? You’ll also want to think about fees, the credit limit, rewards, and even cardholder benefits.
Confused? Here’s the simple version: the lower the rate on your credit card, the better. The higher the rate, the more you’ll be charged when you carry a balance on the card from month to month. This number can be different for purchases, cash advances, and balance transfers. Will you have a fixed rate or a variable rate?
You’ll also want to know how the finance charges are calculated: adjusted balance, average daily balance, daily balance, ending balance, or previous balance? (The Balance offers a deeper look at what each of these means.)
On our credit cards, interest charges are calculated separately for the three different types of transactions: purchases, balance transfers, and cash advances. We calculate the interest charge for each type by applying the periodic rate to the “average daily balance.” For each type, the daily balance is determined by taking the beginning balance each day, adding any new transactions, and then subtracting any unpaid interest or finance charges and any applicable payments or credits. For each transaction type, we add up all the daily balances for the billing cycle and then divide each total by the number of days in the billing cycle. This gives us the average daily balance.
Fees. The fees charged on credit cards can add up and really put a dent in the benefits you might receive from the card. For instance, you’ll want to consider if the card has an annual fee (a fee charged just for the privilege of having the credit card in your wallet). What are the late fees? Will you be charged a fee if you want to make a balance payment over the phone? What about balance transfer fees? Over-limit fees (we’ll take a look at credit limits next)? Cash advance fees? Foreign transaction fees? Expedited payment fees?
You can find the credit limit on the card you’re applying for in the Credit Card Agreement and credit card disclosure documents.
Rewards. Here’s the fun one. Cash. Airline miles. Gift cards or discounts to your favorite retailers. Gas. Experiences. Think about what type of rewards you want to accrue the most and look for a card that offers the most of what you’re looking for.
Cardholder benefits. This is a somewhat overlooked benefit, but we think it’s too important not to discuss. Some card providers offer benefits for cardholders like emergency card replacement, emergency cash disbursement, roadside assistance, cardholder inquiry services, warranty programs on the items purchased on the card, and protection against unauthorized purchases.
NOTE: This is the second in a series of posts addressing some questions you want to ask yourself when applying for a credit card. Look for future posts coming soon on additional topics. The posts have been condensed from an eBook we wrote on the topic. If you want even more detail, you can find the eBook here.