Finding the Best Credit Card

by Gary Foreman

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Dear Gary,
What is the best deal to look for in a credit card? I do not know how companies compute charges. I know there are things you need to avoid. They can use tricks and I want to be wise as I can be when selecting a card. I am one that cannot pay the balance off so I play the game of switching to a card with the lowest interest rate.
Karen P

Karen's right. Selecting a credit card isn't as easy as it used to be. But this is a good news / bad news story. The good news is that you can get a card that's tailored for you. The bad news is that you'll need to compare a few different cards to find it.

Begin by considering how you use your credit card. Do you pay it off each month or carry a balance? What about late charges? Do you trigger one a year? After a review you'll be in a position to compare the features of different cards to find the one that suits you best.

Remember that your credit card costs will be made up of the total of a number of charges: the interest charged on the balance transferred, the interest charged on new purchases, annual fee and any late fees. We'll briefly look at each area.

Let's begin our search for the perfect card by comparing interest rates. Karen is probably getting offers that promote a "low introductory rate." And 2.9% does seem low compared to 4.9%. But how many dollars will Karen save? To find out we need to calculate her interest expense.

Getting a rough figure for interest charged isn't really that difficult. All you need is a calculator. Take your monthly balance (for example, $2,000) and multiply that by the interest rate (say 10% or 0.1). That would give you an interest charge of $200 ($2,000 x 0.1). That's the annual interest charge. You'll need to divide that by 12 to get the monthly interest ($200 / 12 = $16.67).

You'll probably need to do two of these calculations. Why is that? Because most card issuers will charge one rate for the old, transferred balance. That's the advertised "introductory rate." But they'll charge a second, higher rate for new purchases called the "full indexed" rate.

Karen will want to estimate how much she'll spend in new purchases each month. Her monthly payment will go to reducing the old, transferred balance. And her new purchases will gradually build up until her entire balance is at the full indexed rate.

To be precise, Karen should calculate both interest charges for each month of the year. But there's a shortcut that will give her a pretty good idea of what she'll be paying. Just compare the transfer balance to her expected annual purchases on the card.

For instance, in our example Karen was transferring $2,000. Let's assume that she'll make $6,000 of new purchases in the year. If her balance stays the same, her monthly payments will have wiped out the original transfer in 3 months. So the intro rate will be gone pretty quickly.

To further complicate matters card issuers are allowed to use different methods to calculate the amount of interest that you owe. The best method for the consumer is one that uses the average daily balance but excludes new purchases. That means that new purchases don't accrue any interest charges until after the payment date. If you pay your entire bill each month you'll get this method.

The next method uses the average daily balance but adds any additional purchases that you make during the month. That means that if you charge lunch today, you'll begin paying interest on that money tonight. This method is the most commonly used.

The final method is called "two-cycle average daily balance." This method includes your balance for the previous two months and generally will cost you more in interest payments.

Don't try to calculate these methods with a calculator. When you compare cards just check how they calculate interest and choose the one that's most favorable to you.

What else should you look for? Some issuers will give you the option of choosing a "fixed" or "variable" interest rate. The fixed rate is generally higher. But the fixed rate isn't really fixed. The rate can still change if the issuer gives you some advanced warning. And that warning can be as little as 15 days.

Also check to see whether the intro rate is affected by late payments. Many issuers will revert to regular rates if a payment is just one day late. Ouch!

Watch out for fees. The banks have gotten creative in finding ways to get your money. The most common charges are annual fees and late fees. If you have a good credit rating there's no reason to pay an annual fee.

If you carry a balance, you'll need to compare the amount of interest you'll pay to the annual fee. Some annual fees are approaching $100. But, if you carry a balance of $10,000 for a year, a 1% lower rate will provide savings that equal the $100 annual fee ($10,000 x 0.01 = $100).

Late fees generally run from $20 to $35. Other fees are being charged for exceeding your credit limit, taking a cash advance, using an ATM or bouncing a check. Some really creative card issuers have begun charging a closure fee. That's a fee for closing your account. Read the card members' agreement before you use the card to find out about fees.

The best strategy for Karen could be to carry two cards. The first would be one that's offering a low introductory rate. Use that one for any current balances. She'll find rates from 2.9% up to about 6% available as this is written. And it's possible to find one without annual fees.

The second card would be for new purchases that Karen makes. With a good credit rating she'll find cards without an annual fee with rates ranging from 8% to 14%.

Finding a good credit card does take time. But a few minutes now could save you money every month that you use that card.

Gary Foreman


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