Credit is an essential tool that consumers use to meet their short-term needs when cash is scarce in the modern economy. And as the primary form of consumer credit, credit cards are the best way to use them. But not all credit cards are created equal.
On the contrary, consumers have almost unlimited credit card choices – and each has its advantages and pitfalls. And that makes it very important to do careful research before choosing a credit card. Those who don’t may be in for some nasty surprises.
1- Check for hidden costs
Whatever credit card you’re considering, one thing’s for sure: there’s a fee involved. Unfortunately, there are very few legal restrictions on what card issuers can charge. And as a result, most card issuers will charge exorbitant fees whenever possible.
So when evaluating a potential credit card, the first thing to look at is cost. The first thing to look out for is the introductory interest rates offered by the card and their specific terms. Initial rates are designed to encourage users to build significant balances as quickly as possible – so they can add hefty interest charges when the introductory period ends.
It’s also a good idea to keep an eye out for annual membership fees and balance transfers if you plan on consolidating your balance. And of course be wary of payment arrears. However, some credit cards also include a significant interest rate hike as a late payment penalty, making the late payment fee itself the least of your problems.
2- Understand how card issuers calculate interest
One of the pitfalls of credit cards is their relatively high interest rates compared to loans and other lines of credit. And that makes it all too easy for credit card holders to see their balance spiraling out of control quickly. So if you can’t pay off your balance in full each month, you’ll want to know how your card issuer calculates the amount of interest you owe.
In general, you’ll need to divide the interest rate of the card you’re considering by 365 (some card issuers use 350, so check with them to be sure). The resulting number is the card’s daily periodic rate. Then the issuer multiplies that rate by your average daily balance for each day of your billing cycle to determine your interest expense.
And remember: There are no federal laws that limit the interest rates that card issuers can charge. Some state level rules set caps, though, so you’ll want to look up your state’s caps before committing to a particular card.
3- Read the fine print of the card
It is important to remember that you sign a contract with the issuer when you get a new credit card. And the terms of that contract are set out in a cardholder agreement that you must agree to. The issuer must disclose everything about how your new card will work in it. And while it’s tempting to skip the fine print, you should never do that.
Instead, you want to know what all the terms in the agreement mean before agreeing to it. The good news is that the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 is standardized what credit card agreements should contain and how they are written. So that means if you learn to read one, you can read them all.
Credit cards are a necessary evil for most consumers. But if you take due care when choosing one, you can reap the benefits without hurting your bottom line. And as long as you’re careful, your new credit card should open up a whole new world of financial possibilities for you.
Legal Scoops editor-in-chief, Jacob Maslow, has founded several online newspapers, including Daily Forex Report and Conservative Free Press.