We have discussed some of the basic functions of the credit card. “But Colby what do these rates and acronyms mean? And this contract needs a magnifying glass to read the fine print.” Obviously we still have some material to cover concerning credit cards. The material discussed may seem eclectic but that is because when it comes to credit cards there are a bunch of seemingly unrelated pieces that add together in that tiny piece of plastic.
- There are different types of credit cards available.
- One of the most important features of a credit card is the card’s annual percentage return (APR) or the interest rate charged on the card.
- The annual charge and the grace period are two other features to pay attention to.
- If you have more than one credit cards in use, pay the balance on the card with the higher APR first.
Types of Credit Cards
- Standard: This is the most well-known type of card that provides a revolving credit line. Usually no deposit is required and the maximum credit amount is established by the credit card provider.
- Reward: Some credit cards have various reward programs (airline/frequent flier, cash back, premium cards). A caveat about these cards. Be sure to read the terms and conditions concerning the reward program and try to ensure that these restrictions do not outweigh the potential rewards.
- Secured: These credit cards operate a bit differently than the standard card. With a secured credit card when you open an account with the issuer you must make a deposit anywhere from a few hundred to a few thousand dollars which determines the max credit limit you are allowed. These type usually carry higher interest rates and are sometimes used to reestablish damaged credit. Some even have a conversion option in which after so many months of fulfilled payments the card can be converted to a standard credit card.
The Big One: APR
The most important feature to pay attention to is the annual percentage rate (APR) which represents the interest rate charged on the credit card on an annual basis. Now there are a few features that affect an APR including the following:
- Fixed vs. Floating: A fixed APR is just what it sounds like. A fixed APR is an APR that does not change throughout the time the card contract is active. Alternatively a variable APR is a APR that can change over the length of the contract period as the rate is partially determined by an economic indicator. (For example a variable APR may track the LIBOR rate which for now just know is a well tracked interest rate). The interest rate the APR is attached to may go down which would be great for you the card holder as your APR decreases. Contrary wise the attached interest rate may increase driving your APR up. Ouch.
- WARNING!!! Many credit cards market themselves by offering low “teaser rate” APRs for a certain time period. These are called “teaser rates” because they serve the same function as an attractive, half-clothed person on a flyer… to catch your attention. Be sure to read the terms of the credit card agreement as this teaser rate will rise to a higher APR after some time period has elapsed.
Your card issuer is required by law to disclose to you the APR on the card and any changes to the APR.
Annual Charges, Other Fees, and the Grace Period
An annual charge (annual fee) is a fee that the credit card provider may charge you for having an account with them. It is billed annually and starts on the day the credit card account is opened. In addition there may be other fee contingencies present in the credit card contract. A grace period is a period of time during which no interest will be charged on your outstanding balance. The longer this period of time, the better for you the cardholder.
Which Credit Card to Pay Off First?
So let’s assume you have three credit cards all with outstanding balances. Which balance should you pay down first? The most recommended and practical course of action is not to pay down the card with the most outstanding balance, but the card with the highest APR. The reason for this is that a high APR has the ability to turn a small interest charge into a large interest charge given enough time.
- Annual percentage rate (APR): The interest rate charged on a credit card reported as an annual (yearly) percentage.
- Fixed APR: An APR that does not change over the course of the credit card contract.
- Variable APR: An APR which may change over the course of the credit card contract if the economic indicator it is tied to changes.
- Annual charge: An annual fee that a credit card issuer may charge a credit card holder.
- Grace period: A time period in which interest charge does not increase on a balance.