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Choosing a Credit Card

Credit card solicitations may find their way to your mailbox on a weekly, even a daily basis.

Attractive introductory deals jump off the page in 3-inch high bold type, tempting you with low interest rates. But before you fill out that application, read the policy and disclaimers carefully. Ballooning interest rates and hidden fees may be lurking in the fine print.

When choosing a credit card, as with any consumer purchase, it's always a good idea to price compare and be well-informed before making a decision. The following factors should be considered when deciding whether to apply for a particular credit card:

Annual Fee

Is there an annual fee, and if so, how much is it?

Evaluate and understand the interest rate (also called APR – Annual Percentage Rate)

Does the promotional interest rate apply to balances transferred only, to new purchases, or to both? Does that super-low rate expire in a few months, and if so, what will the interest rate be at the end of the introductory period? Will the interest rate increase if you are late with a payment?

Fees and delinquency rates

In 2009 cardholder fees totaled over $20 billion. You don't want to contribute to that figure if you don't have to. So before applying for a credit card, make sure you are aware of the provider's policies concerning:

  • Late payments – Even the most responsible, well-intentioned people may end up paying a bill late one time. If this happens, what kind of a penalty fee are you subject to? Is there a grace period, or does the late fee go into effect the day after the due date? And most importantly, if you are late with one or more payments, can the company increase your interest rate?
  • Balance transfers – Transferring a large balance from a high-interest credit card to a low-interest credit card can be a smart move. But do your research and calculations first to make sure that you really will be saving money. There is almost always a fee for transferring a balance. Find out how much it is and calculate whether that fee is greater or less than the money you would save on interest. Also, find out what interest rate will apply to the transferred balance and whether that is an introductory or a permanent interest rate. If the rate on the balance transferred is going to increase in several months, then there may be no point in transferring the balance in the first place.
  • Over-the-limit fees – Federal law prohibits credit card issuers from charging you an over-the-limit fee unless you've opted-in to have over-the-limit transactions processed. Otherwise, any transaction that would exceed your credit limit will be declined allowing you to avoid the over-limit fee. If you have opted-in to have over-the-limit transactions processed and you exceed your credit limit, you can only be charged an over-the-limit fee for two consecutive billing cycles if your balance remains over the limit. However, if you pay your balance down and it goes over the limit again or if you get a credit limit increase and exceed the new credit limit, your credit card issuer can charge another over-the-limit fee. The average over-the-limit fee is $36, according to Chicago-based market research firm Mintel Comperemedia.

Using Credit Wisely