Evaluate a Credit Card Offer



Is that credit card offer in your hands too good to be true? Maybe. Credit card companies are in the business of making money, so you need to know how their enticing offer is going to benefit them before it benefits you. Once you understand their terms, you can make an informed decision and take full advantage of what you're being offered, minus the hidden fees.

Steps

  1. Find out who sent you the offer. It could be from an independent marketer, even if there are references to major credit card names, attempting to charge you simply for mailing you a credit card application. Look on the reply envelope, the letterhead of the principal offer, and in the terms and conditions--if you see a name like "Processing Center" or "Credit Card Administration", shred the application and move on.
  2. Compare Personal Loans for purchases. This is the percentage of your balance that you pay in interest per year. It appears in big type, but you aren't guaranteed this APR. Once you apply and your credit history is analyzed, it may change. If it's an introductory rate, it should also say how long that rate will last. Also keep in mind that low interest cards typically have fewer rewards. And if you pay off your balance in full each month, you won't be charged any interest. As a result, a low interest card may or may not be your best option, depending on how you plan to use the credit card.
  3. Consider other APRs. Cash advances and balance transfers have a different (often higher) APR and usually involve a transaction or balance-transfer fee (around 3%). Look for 0% APR and ask to have the fee waived--43% of issuers will do this if you're a new customer.
    • When you get a cash advance or transfer a balance and get a low or 0% APR, all your other charges (before and after) still get charged normal interest. The tricky part is that when you make a payment on the credit card, the payment gets applied to the lowest interest rate balance so that your higher interest rate balance remains on the card until your cash advance or balance transfer is completely paid off; during all that time, it's charged at the normal (high) APR.

      • Example: You have a balance of $1200 at 15% APR. You get a cash advance for $1200 at 0% APR for 12 months. You're going to make payments of $100 per month, paying off that previous $1200 balance--as you pay it off, your interest charges will go down because the balance goes down, so you'll end up paying about $108 in interest.[1] You don't worry about the cash advance because you don't have to pay for that for a whole year, right? Wrong. Your payments will be applied towards the cash advance while you get charged the full 15% APR for the previous balance, which is $180--$72 more than you expected! Plus, if you don't pay off that cash advance in full before a year has passed, you might get slammed with interest charges for the entire year (another $180 or more).
      • To prevent any surprises, pay off your entire balance on a card before getting a cash advance or balance transfer, and don't charge anything else on the card until that low/no APR balance is completely paid off. Plan to pay it off in full before the promotional APR expires, and you'll have gotten a 0% loan and beaten the credit card company at their own game!
    • Look for the penalty or default rate. This is what is charged if you pay late or go over your limit and can go over 30%. The terms upon which this rate kicks in varies from offer to offer. Look for a card with forgiving terms, such as allowing one or two late payments before the higher APR takes effect. E.g. "If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply."
  4. Work out the variable rates. If your APR varies, the offer must specify how. Usually it varies based on the Prime Rate, and the offer will say something like: "Your APR for purchase transactions may vary.The rate is determined monthly by adding 5.9% to the Prime Rate.**" and the footnote could say: "** The Prime Rate used to determine your APR is the rate published in the Wall Street Journal on the 10th day of the prior month."
  5. Look at the grace period. This is the amount of time you have to pay your bill in full before you get charged interest on the balance. Most cards have a 20-30 day grace period. If the card doesn't have a grace period, you get charged interest as soon as you charge. And remember that if you don't pay your account balance in full every month, there is no grace period.[2]
    • Did you know that if you don't pay for a charged amount in full during the grace period, you get charged interest for the entire charge, even if you paid off most of it during the grace period? Let's say you buy a bed for $1,000 on August 1 and that's the only charge on your card. Before your grace period ends, you pay $999, which means you still have $1 of that charge left to pay when your grace period expires. But, you'll get charged interest for the entire $1000 from the day you made the purchase (or from the first day of the billing cycle in which you made the purchase) regardless of the fact that you paid off most of it already, and regardless of when that payment was made. This is a common practice called trailing interest that credit card companies are often criticized for.[2]
  6. Find the method used to compute the balance for purchases.
    • "Average daily balance": Your balance is calculated every day, and the interest is charged based on an average of those balances.

      • With this method, you can actually lower your interest charges by breaking your payments into pieces. Let's say you have a balance of $1000 and you pay it on the last day of the cycle. Your average daily balance will be $1000, so you get charged, say, 13% ($130/12 = $10.80) for having carried that balance for those 30 days. But what if you pay $500 halfway through the cycle, and another $500 on the last day? Your average daily balance will now be $750 (it was $1000 for the first 15 days, $500 for the other 15 days) and your finance charge will be 13% of that, which is $97.50, and $8.13 if you carry the balance for only 30 days, which is 25% lower than if you made the payment in full at the end of the month!
      • In the UK, the "daily accrual" method is commonly used. It is similar to the average daily balance method--the differences are negligible.[3]
    • "Adjusted balance": Right before your bill is printed and mailed, the issuer subtracts any payments made during the current billing period from the balance at the end of the previous billing period. It gives you the rest of the billing cycle to pay part of the balance and avoid paying interest on that amount. This is considered the most advantageous computation method.[4]
    • "Previous balance": You get charged based on the previous month's balance, not the current one. It's not necessarily bad; all it does is delay when you get charged for a particular balance, but it might make for a few surprises if your balance fluctuates dramatically, such as if you only charged $25 this billing cycle but it's time to get charged for your $2000 of charges in the previous cycle. Or, that could be a good thing--if you have to make a big purchase one month, it might be helpful to not have to pay the interest until next month, when your bank account is replenished by a new paycheck.
    • "Two-cycle average daily balance" or "two-cycle billing": Some issuers calculate your finance charges based on an average of your current and previous months' balances, essentially making you pay interest on debt you've already paid off! For instance, if you charged $1000 last month and paid it off in full, and your balance this month is only $10, you'll get charged interest for $505 (the average of $1000 and $10); if your APR is 15%, that's $75.75. Avoid this at all costs (pun not intended) if your balance tends to fluctuate.
  7. Check the annual fees. Most airline and cash back reward cards have an annual fee, so make sure that the benefits of using that card outweigh the cost of being a card member. You can also ask to have the annual fee waived every year.
  8. See if there is a minimum finance charge. If you carry a small balance, the interest charge might be remarkably low. If it's less than the minimum finance charged (e.g. $0.75), you'll get charged the minimum finance charge instead. If you tend to carry a large balance for which the finance charge is reliably higher than the minimum finance charge, this term is not as important.
  9. Note the fees. Getting charged any of these fees will get you closer to your limit, and will usually trigger the default/penalty rate and eliminate your grace period.
    • transaction fee for cash advances
    • balance-transfer fee
    • late-payment fee
    • over-the-credit-limit fee
  10. Read the fine print. Look for the following pitfalls:
    • Raising the rate, just because. Some issuers reserve the right to raise your APR even if you've never been late with your bill. The phrase "any time for any reason" is a red flag.
    • Universal default clause. This practice involves raising your APR if you make a late payment on any loan. Check for the phrases "defaults to other creditors" or "delinquent on an account with any other creditors".
    • Dispute resolutions, binding arbitrations. If there's a dispute, an independent third party resolves the issue--not a judge or court. The decision is final and there's no disputing or appealing. Mandatory arbitrations mean you waive your right to sue and will always be required to use an arbitrator. However, such clauses are not likely to hold up in court.
    • Additional fees, like getting charged a fee if you don't update your account every year.

Tips

  • If in doubt, call customer service and get specific answers. Get the representative's name and identification number, as well, in case they give you the wrong information and you end up getting charged for something they said you wouldn't. You can use your record of this conversation to get those charges dropped.
  • In the US, every credit card offer is required to have a standard box, often called "Schumer's Box" after the Congressman responsible for the legislation that requires it, which clearly outlines the terms of the offer in the order presented above. Most of the time this is located on the backside of sheet of paper the company sent.
  • Some merchant credit cards (such as those issued by department stores) are good only with the issuing merchant.
  • If you trust your local banker, you can take the offer to them and ask them to fairly evaluate it for you. Be aware that they will be biased to their own products though.
  • No matter what type of credit card you get, try to pay in full (or as best as you can) each month. Many cards try to trick you by giving you money or other rewards back for carrying a balance. But the interest and other finance charges will always far outweigh whatever rewards you are offered.

Warnings

  • Be accurate when filling out the credit application. If you default on your payments, any inaccurate information on your application can be used against you as evidence of intent to deceive.
  • Being pre-approved doesn't mean anything, except that the issuer wants you to fill out an application before they make you a solid offer of credit. Until that point, nothing is set in stone.

Related Articles

Sources and Citations

  1. ↑ http://www.indexcreditcards.com/creditcardcalculators/howmuchininterest.html
  2. ↑ 2.0 2.1 http://www.consumeraffairs.com/news04/2007/03/senate_credit_cards02.html
  3. ↑ http://en.wikipedia.org/wiki/Credit_card_interest
  4. ↑ http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre05.shtm
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