FINANCIAL LITERACY
Choosing a Credit Card
An APR can be:
Like most people, your mailbox is probably full of preapproved
credit card offers. So, which one do you choose? Should you
make a switch or keep the card you have? Before you begin to
determine whether or not a credit card is right for you, you
should answer the following questions.
Fixed: A fixed rate is one that does not fluctuate with
changes to an index (base) interest rate. This does
not mean that the interest rate will never change, but
the issuer generally must notify you before the change
occurs; or
• How much will you spend on the card each month?
Variable: A variable rate changes with the index (base)
interest rate. In most instances, the index is tied to a prime
rate, the Treasury Bill rate, the federal funds rate, or the
Federal Reserve discount rate. In each of these cases, the
rate will fluctuate depending upon the index; or
• Do you plan to pay off the balance on the card
each month?
• Do you plan to roll over the balance on the card each
month, paying the minimum balance or another portion
of the balance?
Tiered: A tiered rate is one that changes with outlined terms.
For example, it may be tied to the balance on the card, or
the type of transaction made.
• Are you willing to pay an annual fee for the card?
• Do you have a good, strong credit history?
Once you have answered these questions, you should then
begin to research your options. Take your time to compare
the critical elements of a credit card to make the right choice.
We have provided some valuable comparison elements for
you to consider in this course. (NOTE: By law, all credit card
issuers MUST provide the rules to determine which
transactions fall into which categories and must list the
different interest rates and fees.)
Grace Period
Annual Percentage Rate (APR)
Card Fees
An APR is the interest you pay on an annual basis applied to
the balance on your card. The higher the APR, the more
interest you will pay on a balance you carry from one billing
cycle to the next. Many credit cards have a different APR for
purchases, balance transfers and cash advances. Be cautious
to look for changes in the APR under certain conditions,
especially if you get a lower rate for an introductory period.
There are many different types of fees that are associated
with credit cards. The most common types of fees are:
The grace period is the amount of time between the end of a
billing cycle and the date payment is due. Your due date is at
least 21 days after the close of each billing cycle. You will not
be charged interest on purchases if you pay your entire balance
by the due date in each billing cycle. Grace periods typically
apply only to purchase transactions.
• Annual fees: An annual fee is a charge for the use of
the credit card on an annual basis. In most instances,
the type of card (and the benefits associated with the card)
determines the amount of the annual fee.
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Choosing a Credit Card (Continued)
• Late payment fees: A late payment fee is a fee charged to
a consumer when he/she misses a payment; these fees
usually range between $15 and $50. Make sure you are
aware of any time constraints on the payment date as well.
Some creditors will require payment by a certain time of day
on a certain date to avoid penalty. Additionally, if too many
late fees are assessed, some creditors will increase the
APR as another type of penalty for the consumer. All of
these things must be disclosed, so make sure you read the
fine print.
• The adjusted balance method: The adjusted balance
method is perhaps the easiest to understand. It simply takes
the outstanding balance at the beginning of the billing cycle,
and then takes out any payments or credits during that
billing cycle.
• Over-the-limit fees: When you have agreed to do so
(opt-in), an over-the-limit fee is assessed when consumers
spend more than they have on their credit limit. For
example, if a person has a credit limit of $15,000 on a
credit card, and after a transaction, the balance will be
$15,500, some financial institutions will go ahead and
approve the charge, but then charge an over-the-limit fee.
In most instances, these fees usually are around $25.
The average daily balance method is the most common and
least expensive for the consumer.
• The previous balance method: The previous balance
method is the outstanding balance at the beginning of the
billing cycle, without taking into consideration any
outstanding payments
Credit Limit
The credit limit, or the amount you can purchase on your card,
may influence your purchasing power. In most instances, if you
are new to credit, or trying recover from a credit problem, your
credit limit will be low. As you become more familiar with credit,
or show you can be responsible with a certain credit amount,
you may be given a higher credit limit automatically or upon
request. Be wary of no-limit cards, as they may look maxed out
on your credit report.
• Cash advance fees: Most card issuers charge a fee when
a person takes a cash advance against a credit card. These
fees can be very high, to the tune of 2% to 4% of the
amount taken, and they usually do not have a grace period
associated with them.
Rewards
Calculation of the Finance Charge
Because many credit cards may look alike, many card issuers
attach special rewards to lure consumers to their cards. Some
common rewards on cards include airline mileage or points,
cash back bonuses, and purchasing points for consumer goods.
In each instance, you should read through all of the material to
review the terms and conditions of these offers.
The method used to calculate the finance charge on a card has
an impact on the amount of the charge. Some methods take
only the current month’s balance into account, while others
consider the current and previous months’ balances.
Additionally, new purchases may or may not be considered in
the calculation.
Many credit experts recommend that you look at more than
one card of interest and compare all of these items in a chart.
Look for the card that you feel will suit you best. For example, if
you plan to pay off your balance in full each month, you may
not be as concerned with the rate, but may be enticed by the
rewards the card may hold. If you plan to roll over your balance
from month to month, the APR and the calculation method on
the card will be critical in your decision. You may be averse to
being charged an annual fee, but would like to sign up for the
reward programs associated with a certain card. You may want
to have a fixed rate over a variable.
The most common methods for calculation are:
• The average daily balance method (with or without new
purchases): With the average daily balance method, your
interest charge is the average daily balance for the billing
cycle divided by the number of days in the billing cycle,
then multiplied by the interest rate. In other words, the card
issuer adds up the outstanding balance for each day during
the billing cycle and divides it by the number of days in the
billing cycle and multiplies the total by the interest rate.
• The two-cycle average daily balance method (with or
without new purchases): The two-cycle average daily
method starts the same as the average daily balance
method, except it takes the current and the preceding
billing cycle into consideration when computing the finance
charge.
Whatever you desire, you must read all of the fine print in any
credit card offer to be sure you are getting exactly what you
desire. The worst thing that can happen is to find out about
hidden costs and fees after the fact. Take the time now to do
your homework, talk with an expert you trust, and pick the card
that is right for you.
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Choosing a Credit Card (Continued)
Credit Card Comparison Chart
What is the best credit card for you? Let’s find out. Take a moment to fill in the all of the information below to create a good
comparison between all credit cards in which you have interest.
Credit Card
APR
Grace Period
MEMBER FDIC. EQUAL OPPORTUNITY LENDER.
Comerica Bank NMLS ID: 480990
The information provided in this article is not intended as legal advice and should not be relied on as such.
Contact your legal advisor and/or accountant for further information specific to your situation.
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Fees/Finance Charge
Rewards/Special
Awards
CBC-4236-12 11/14