Like almost everything else, the price of using someone else's money — aka interest — is going up. And that matters a lot if you carry a balance on your credit card.
At the same time, you may be getting a new wave of credit card offers with appealing features whether you carry a balance or smartly pay in full every month. Those features may include a low introductory interest rate, regular cash back on purchases ranging from 1% to 5%, airline miles, discounts on gift cards or gasoline, etc. You might even be offered cash in addition to the regular rebates just for spending money.
But all those shiny goodies may come with a higher interest rate that can quickly overwhelm the benefits if you already have debt you need to pay off.
One credit card charges an annualized interest rate of 18% while another charges 15%. If you owed $3,000 and could only afford to pay $100 per month without adding any additional charges, you would pay $1,015 in interest on the 18% card compared with $783 on the 15% card before paying off the balance.
And this dire warning: "If you pay only the minimum payment every month, it would cost you even more."
Here, according to the CFPB, are the four steps to make sure you are getting the best credit card for you.
1. Decide how you plan to use the card.
Everyone wants to pay off their balance every month to avoid interest charges, but be honest with yourself. "If you already have a credit card, let history be your guide," the CFPB says. " If you have carried balances in the past, or think you are likely to do so, consider credit cards that have the lowest interest rates. These cards typically do not offer rewards and do not charge an annual fee."
But if you generally do pay off your balance every month, comparing the rewards and rebates makes sense. Keep in mind that any annual fee for the privilege of using the card will reduce the value of the rewards.
2. Know what to compare.
Annual Percentage Rate (APR): Sometimes a credit card offer lists several rates or a range of interest rates, and you won’t know the rate you’ll get until after you’re approved. Would you still want the card if you had to pay the higher advertised rates?
Fees: Compare the fees listed for each card. Common fees include a cash advance fee, a late payment fee, and for some cards, an annual fee.
APR for balance transfers: Transferring a balance from an existing card to a new one can be smart if the APR is lower. But don't forget to study the terms of any low introductory rate, plus any balance transfer fee.
Penalty APR: Check for a penalty APR. The offer must tell you what the penalty rate is, what triggers it — like late payments or charges that exceed the limit set by the lender — and how long it would last.
3. Shop around and ask for better deals.
You may not have to do business with a new lender to get attractive terms. Talk to your bank or credit union. "If you have a credit card and are happy with your service, but think you’re paying too much in interest and fees, then ask the issuer to match or beat the terms and rate on the new card you’re considering," the CFPB advises. But be selective when opening a credit account, as too many cards can lower your credit score, which means higher interest rates all around.
4. Transfer your account with care.
A 0% interest rate on balance transfers sounds great, but you may be charged a balance transfer fee of 3% to 5% of the balance. Don't close your old account until you are sure the balance has been transferred to the new one. And if you decide you've made a mistake, you can generally change your mind if you act within 10 days.
Mind Your FAQs
The CFPB has a worksheet on comparing credit cards in its publication "Your Money, Your Goals," which it describes as "a financial empowerment toolkit." (Download the 244-page toolkit here.) Here are recommended questions to answer when comparing credit cards:
Fees and other costs
What are the fees associated with the card (annual fee, late fee, etc.)?
What is the APR, or annual percentage rate, on the card? Is it a promotional rate? If so, what will the new APR be after the promotion ends?
Are there fees to use the card in another country? How much?
Are there limits on where I can use the card?
Can I check my balance any time of day by phone, online, or with a mobile app? Is there a fee for this? How much?
Can I choose my own due date for the bill?
More Sources to Help Make Smart Credit Card Decisions
The Work Wife reached out to Charlestien Harris, a credit and housing counselor with Southern Bancorp Community Partners. Here sources of information on credit cards she recommends:
- How to Choose Your First Credit Card (Credit.com)