If you're new to the world of credit and credit cards, you have to know one thing: not all credit cards are created equal. Some credit cards and credit card companies even engage in shady practices, hoping that their clients won't read the fine print, and will get into a credit card contract that benefits the company a lot more than the user. If you're looking to get a new credit card, here are some of the main characteristics that you should use for comparison in order to make the decision that's right for you. (For related reading, also take a look at 4 Tips For Picking The best Credit Cards.)
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- Interest Rates
This is one of the most important ways you can compare credit cards. The annual percentage rate (APR) is the interest rate that you'll pay yearly (monthly rate multiplied by 12). However, it's not always what it appears because there are introductory rates, rates that change with the amount of balance you keep on the card and different rates that are applied to different ways you use the card. For instance, higher interest rates are usually applied to cash advances, and different rates than the APR are applied to balance transfers - that is, if you shift the balance of your credit card to a different account with a lower rate. Read the fine print on credit cards' APR so that you know where you get the overall best deal, not just the best short-term deal or best deal for a certain way of using the card.
As well, APRs are either fixed or variable, meaning they're either going to remain constant for a certain amount of time, or they depend on the prime rate. Make sure you understand what your credit card company is charging on top of the prime rate, and whether the company has the right to change the rate as it sees fit. (Learn more in APR and APY: Why Your Bank Hopes You Can't Tell The Difference.)
- Billing Cycle or Grace Period
This is important, as it will determine when you'll start paying interest on your purchases. A longer grace period is always better (all other things staying the same) as it means you're essentially getting a free loan for a certain amount of time.
Many credit cards will have annual fees, and they aren't always bad if you're paying them to get something that benefits you. For instance, some credit cards that offer a lot of travel miles will charge a higher annual fee, but this can actually lead to savings for you if you travel a lot. Compare the fees between cards and see what you're getting for that fee. As well, if there's no fee, investigate whether this will lead to a higher APR. Taking cash advances on your credit card or transferring the balance to another card can also have associated fees.
- Special Offers and Expiry Dates
Many credit card companies will offer introductory rates for your APR, cash advance and balance transfer fees. Be sure to look into when these offers expire, as the company will advertise that the APR is a certain percent, but there will be an asterisk or similar sign beside it, advising you to read the fine print. As well, some credit cards will waive the annual fee for the first year, so make sure you know the permanent details of your credit card and which will not last.
- Minimums and Penalties
Credit cards will have minimum monthly payments that users are required to pay, which can take the form of either a percentage or flat fee. If this payment is not made within a given time, credit card companies can charge a penalty fee. If you think that you may not be able to pay your credit card every month - which may be a reason to reconsider getting one altogether - look for the credit card that has the lowest limit and low or no non-payment fee.
- Points and Rewards
As mentioned previously, many credit cards offer points and rewards for using them. These can sometimes come with a fee, but can also exist with no-fee credit cards. Once you've made sure that you're getting the best deal on all of the fundamentals (interest rates, grace period, fees), check out what extras you can get in terms of points and rewards.
Some cards are tailored to students, travelers, shoppers, business people, etc., so you should find one that fits your needs. This is kind of like an amalgamation of the rest of the factors, as a credit card tailored to a student, for example, probably has little of no fees and a lower spending limit, but might make up for this by having a higher APR. Similarly, a card directed to the wealthy consumer might have a lower APR, a huge limit and a higher annual fee. Cards directed towards travelers will offer more points that can be redeemed for flights, and usually a bonus amount of points just for signing up, but may then charge a higher annual fee and higher APR.
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The Bottom Line
There are a lot of cards out there to choose from, and using the above criteria to compare the available cards will ensure that you get the one that's right for you. If you have any questions about a credit card, be sure to ask the company before you sign up for it, you don't want to miss some of the fine print and be in a contract for a card that you don't want.
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