Choosing a credit card, information and confidence count

Getting the facts gives consumers greater control of their credit cards.

Today there are plenty of choices when it comes to finding a credit card to meet your individual financial goals and money management style. In a research study, “The Effects of Perceived and Actual Financial Knowledge on Credit Card Behavior “ conducted by Sam Allgood and William B. Walstad, it was found that individuals with a high level of actual financial knowledge and perceived financial knowledge reported better credit card practices than those individuals with a high level of actual financial knowledge, but a low level of perceived financial knowledge. So it’s important for consumers to be both informed and confident as they consider using credit cards. A few items to review before applying for a credit card include personal spending habits, fees, interest rates, grace periods and balance computation.

Spending Habits
Barbara O’Neill, Ph.D. and Certified Financial Planner with Rutgers Cooperative Extension, says “The best way to select a credit card is to match it to your intended use and bill-paying habits.” O’Neill describes the following types of credit card users.

  • Revolvers are credit card users who rarely, if ever, pay their credit card bills in full and, thus, pay finance charges each month to carry outstanding debt. If you plan to carry a balance from month to month, select a credit card with a permanently low-interest rate, i.e., not a teaser rate that quickly expires after a few months.
  • Convenience users are people who pay their bills in full each month, thereby avoiding interest charges on new purchases when using credit cards with a grace period. For purchases that will be repaid in full the following month, the best credit card to use is one with no annual fee and a 20- or 25-day grace period. If the credit card also provides cash-back features or other valuable rewards, this is good too.

Annual Percentage Rate (APR)
For credit cards, the APR is the cost of credit expressed as a yearly interest rate. Each billing period (usually about a month), the company charges a fraction of the annual rate, called the periodic rate. The APR must be disclosed before your account can be activated, and it must appear on your account statements. Your card issuer also must disclose the periodic rate.

When evaluating a credit card offer, scrutinize everything. O’Neill states that a disclosure chart, also known as a Schumer Box, must include the following nine items:

  • The actual APR after the introductory rate expires
  • The APR formula if the interest rate is variable
  • Length of the grace period
  • Amount of annual fee, if any
  • Minimum finance charge
  • Transaction fees
  • Method of computing the balance for billing
  • Late payment fees
  • Over-the-limit fees

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