Evaluating Credit Card Interest and Fees

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Evaluating Credit Card Interest and Fees

Credit card interest and fees are not created equal. Some will cost you a lot more than others. Here is what to look for:

The APR

The interest rate you will pay on your card is called the annual percentage rate, or APR. APRs differ among cards, sometimes greatly. If you don’t usually incur fees or care much about the bells and whistles of different cards, then the APR may be the major selling point for you. Some APRs are fixed while others are variable, meaning that they change periodically.

There are three APRs you should be aware of. There are promotional APRs (also called introductory or teaser APRs) for balance transfers and for some new cards. These APRs last a certain amount of time before switching to the regular APR, which is the normal rate charged on your card. There is also a default APR, which will kick in if you violate the terms of your credit card agreement by, say, making a late payment.

Compare APRs for several cards. If your credit is good, you should qualify for lower rates. If you belong to a credit union, you may get an even lower rate on its card. Don’t be taken in by cards with low promotional APRs: the regular APRs that they will switch to might be higher than you want. That’s why it’s important to compare the three APR types among several cards.

APRs that are advertised may not apply to everyone. Read the fine print to see if you qualify.

Cash advance and balance transfer rates

The APRs on cash advances and balance transfers differ from the regular APR; they are often higher. Compare these rates among cards as well, especially if you plan to use these features a lot.

How the finance charge is calculated

Interest is not calculated the same way for all credit cards. A card will use any of the following methods:

• Average daily balance. Each day’s balance in the billing cycle, averaged out.
• Beginning balance. The balance at the beginning of the billing cycle.
• Adjusted balance. The beginning balance minus any payments made during the month.
• Ending balance. The balance at the end of the billing cycle.

Based on your spending and payment behavior, which of these would result in the lowest interest for you? That’s what you must consider.

Fees and penalties

Know every fee and how much it is and what causes it to apply. Fees aren’t always the same for every card; some cards are more severe than others. And some cards with otherwise attractive features will compensate for them by charging high fees and penalties. Fees are charged for going over your credit limit, paying late, transferring balances, making cash advances, paying your bill by phone, putting a stop payment on your card, and other occurrences. Additional fees may arise in the future, such as swipe fees that compensate merchants for fees they must pay to credit card companies.

When comparing cards, you can find some good deals. For example, if you plan to do balance transfers, there are cards that have no transaction fees and/or zero percent interest for a certain number of months, such as 12. Again, the better your credit is, the more chance you will qualify for good deals like these.

Some cards charge annual fees. In return for these fees, they may offer better features than non-fee cards. For you, would the benefits of using an annual-fee card outweigh the annual fee?