When it comes to obtaining a new credit card, you may not have as many choices as people who already have good credit. But you should still do some comparison shopping to make sure you are getting the best deal available to you. Credit card terms and interest rates vary - and some of those variations can make a huge difference to your wallet. Always shop for the card with the best interest rate and terms.
Here’s what you should look for in a credit card:
1. Avoid high interest rates. Credit card companies disclose the interest rate in several ways, but you want to look at the Annual Percentage Rate (APR). This is the amount of interest, transaction fees, and other charges that you will pay per year, expressed as a percentage. It is the best indicator of the actual interest you will pay.
2. Avoid low introductory rates. Some cards have a low “introductory rate” (also called a “teaser rate”). After a few months, the interest rate will skyrocket. Also, sometimes the advertised rate only applies to certain people, such as those earning a high income. The card company charges a much higher rate to those who don’t qualify - which could mean an unpleasant surprise when your first bill arrives.
3. Understand interest calculations. Many banks today charge interest based on the average daily balance. This is how it works: Say you charge $1,500 on your credit card and pay $1,200 on the due date. When your next bill arrives, a bank using the average daily balance will charge interest on the $1,500 average daily balance from the previous month, not on the $300 you still owe.
4. Review the grace period. This is the interest-free period of time between the purchase date and the bill due date. It is usually available only to those who do not carry a balance. If you pay your bill in full each month, make sure you have a grace period. Otherwise, you’ll pay interest from the date of your purchase. If you carry a balance, a grace period is not important.
5. Avoid high annual fees. Some credit card companies charge you a flat fee (in addition to interest and other charges) for using their card. Some do not. If you pay off your balance each month, you want a card without an annual fee. If you carry a balance, a card with an annual fee but a low interest rate may be better than a card with no annual fee but a high interest rate.
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