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Shopping For A Credit Card

What's the best credit card deal? Is a lower rate worth the annual fee? Which is better - flight miles, rebate points, or low rate? Consider all of these features when selecting the best credit card for you.

Shopping for a credit card can seem like looking for a needle in a haystack, but following some simple steps can get you to your goal.

Types of Cards

First, you must decide what type of credit card you want and need. There are basically two types of credit cards:

• Unsecured cards are those that are not secured with cash. They are based on your past credit history.
• Secured cards are those that are secured with a certain amount of cash. Your credit limit is usually equal to the amount of cash with which you have secured the card. The benefit here is building your credit history with small purchases each month and total payoff at the end of each month.

Additional Credit Card Features

Depending on who the issuer is, there are many different features available on credit cards:

• Rebate cards offer monetary rebates based on the amount of purchases you make on the card. These rebates can range from one to about three percent of total purchases, based on the card. Rebates are usually processed annually, and generally appear as a positive amount on your statement. The likelihood of getting a whopper of a check in the mail is pretty low, unless you plan to make many purchases and your credit limit is quite high.
• Point cards offer points that can be redeemed for merchandise or airline tickets. Again, the amount of points you receive is based on the amount of purchases you make on the card. The point statements usually are processed quarterly, and can be redeemed whenever you reach an amount needed for a particular redemption item. However, these points usually don't hang around forever. They are sometimes voided at the end of a certain time period.
• Affinity cards associate cardholders with certain institutions, companies or service groups. These cards offer incentives for use in the form of discounts, special services, and donations.
• Co-branded cards are a type of affinity card where a partnership exists between a card issuer and another company. Both brands are on the card. These cards are most commonly offered with airlines where frequent flier miles are awarded for amounts of purchases on the card.

Evaluating the Cost of Using Credit

There are many variables to consider when evaluating the cost of credit. You must also compare the cost to the additional features that may be a part of the credit card offering.

Finance Charges

• Interest Rate: Credit card companies look at your past credit history to determine the rate they are willing to offer. If you want to carry a balance on your card, you will probably look for the lowest rate. If you plan to pay off your balance each month, the interest rate is not as much of a concern. Often point or rebate cards have higher interest rates in exchange for the benefits.
• Introductory Rates: Some credit card companies offer introductory rates, which are also called initial or teaser rates. These rates are set for a certain amount of time and then rise to another specified amount at the end of the introductory period. Introductory rates are often offered as incentives to transfer balances from other cards. Be sure you know the rate you will be paying after the introductory period is over, as it may be quite different from the lower rate.
• Calculation of Interest: Card companies compute finance charges differently and offer different grace periods for purchases. Make sure you understand these important variations as you evaluate your credit card options:
  
  
  • Adjusted Balance Method: Some companies compute finance charges based on an adjusted balance. This method is usually the most advantageous method to cardholders and subtracts all payments made within a month from the balance at the end of the previous month. New purchases are not included when finance charges are calculated.
• Average Daily Balance Method: Most companies use the average daily balance to figure finance charges. The daily balance is calculated by deducting any payments or credits from the day's beginning balance. Your daily balance is added each day and then divided by the number of days in the billing cycle to arrive at the average daily balance. This figure is multiplied by your monthly periodic interest rate to determine your monthly finance charges.
• Previous Balance Method: This method simply computes finance charges on the ending balance of the preceding billing cycle.

Make sure you know what method your credit card issuers are using to calculate finance charges. It makes a difference in the total annual percentage rate you will pay. For an explanation of credit card terms, reference the Financial Glossary.

Fees

You must also determine whether the card carries an annual fee. Generally, cards with more offered services have higher annual fees. Some cards have no annual fee. Also consider the cost of other fees, such as late fees, over-the-limit fees, and cash advance fees. The U.S. Government Accountability Office submitted a report to Congress in 2006 about credit card fees. Read the highlights of the GAO report, or download Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers.

Other Considerations

When shopping for the best credit card for your situation, you also need to consider how long the grace period is and when the billing cycle runs.

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