How will you use your credit card?

The first step in choosing a credit card is thinking about how you will use it.

If you expect to always pay your monthly bill in full--and other features such as frequent flyer miles don’t interest you--your best choice may be a card that has no annual fee and offers a longer grace period.

If you sometimes carry over a balance from month to month, you may be more interested in a card that carries a lower interest rate (stated as an annual percentage rate, or APR).

If you expect to use your card to get cash advances, you’ll want to look for a card that carries a lower APR and lower fees on cash advances. Some cards charge a higher APR for cash advances than for purchases.

What are the APRs?

The annual percentage rate--APR--is the way of stating the interest rate you will pay if you carry over a balance, take out a cash advance, or transfer a balance from another card. The APR states the interest rate as a yearly rate.

Multiple APRs

A single credit card may have several APRs:

   • One APR for purchases, another for cash advances, and yet another for balance transfers. The APRs for cash advances and balance transfers often are higher than the APR for purchases (for example, 14% for purchases, 18% for cash advances, and 19% for balance transfers).

        •Tiered APRs. Different rates are applied to different levels of the outstanding balance (for example, 16% on balances of $1?500 and 17% on balances above $500).

        • A penalty APR. The APR may increase if you are late in making payments. For example, your card agreement may say, “If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply.?/p>

       • An introductory APR. A different rate will apply after the introductory rate expires.

       • A delayed APR. A different rate will apply in the future. For example, a card may advertise that there is “no interest until next March.? Look for the APR that will be in effect after March.

If you carry over a part of your balance from month to month, even a small difference in the APR can make a big difference in how much you will pay over a year.

Fixed vs. variable APR

Some credit cards are “fixed rate?-the APR doesn’t change, or at least doesn’t change often. Even the APR on a “fixed rate?credit card can change over time. However, the credit card company must tell you before increasing the fixed APR.

Other credit cards are “variable rate?-the APR changes from time to time. The rate is usually tied to another interest rate, such as the prime rate or the Treasury bill rate. If the other rate changes, the rate on your card may change, too. Look for information on the credit card application and in the credit card agreement to see how often your card’s APR may change (the agreement is like a contract--it lists the terms and conditions for using your credit card).

How long is the grace period?

The grace period is the number of days you have to pay your bill in full without triggering a finance charge. For example, the credit card company may say that you have ?5 days from the statement date, provided you paid your previous balance in full by the due date.? The statement date is given on the bill.

The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away.

If you carried over any part of your balance from the preceding month, you may not have a grace period for new purchases. Instead, you may be charged interest as soon as you make a purchase (in addition to being charged interest on the earlier balance you have not paid off). Look on the credit card application for information about the “method of computing the balance for purchases?to see if new purchases are included or excluded. Information on methods of computing the balance is in the section “How is the finance charge calculated??

How is the finance charge calculated?

The finance charge is the dollar amount you pay to use credit. The amount depends in part on your outstanding balance and the APR.

Credit card companies use one of several methods to calculate the outstanding balance. The method can make a big difference in the finance charge you’ll pay. Your outstanding balance may be calculated

 Over one billing cycle or two,

      Using the adjusted balance, the average daily balance, or the previous balance, and

      Including or excluding new purchases in the balance.

Depending on the balance you carry and the timing of your purchases and payments, you’ll usually have a lower finance charge with one-cycle billing and either

      The average daily balance method excluding new purchases,

      The adjusted balance method, or

      The previous balance method.

Minimum finance charge

Some credit cards have a minimum finance charge. You’ll be charged that minimum even if the calculated amount of your finance charge is less. For example, your finance charge may be calculated to be 35?-but if the company’s minimum finance charge is $1.00, you’ll pay $1.00. A minimum finance charge usually applies only when you must pay a finance charge--that is, when you carry over a balance from one billing cycle to the next.

What are the fees?

Most credit cards charge fees under certain circumstances:

Annual fee (sometimes billed monthly). Charged for having the card

    Cash advance fee. Charged when you use the card for a cash advance; may be a flat fee (for example, $3.00) or a percentage of the cash advance (for example, 3%)

     Balance-transfer fee. Charged when you transfer a balance from another credit card (Your credit card company may send you “checks?to pay off the other card. The balance is transferred when you use one of these checks to pay the amount due on the other card.)

     Late-payment fee. Charged if your payment is received after the due date

    Over-the-credit-limit fee. Charged if you go over your credit limit

     Credit-limit-increase fee. Charged if you ask for an increase in your credit limit

     Set-up fee. Charged when a new credit card account is opened

      Return-item fee. Charged if you pay your bill by check and the check is returned for non-sufficient funds (that is, your check bounces)

    Other fees. Some credit card companies charge a fee if you pay by telephone (that is, if you arrange by phone for payment to be transferred from your bank to the company) or to cover the costs of reporting to credit bureaus, reviewing your account, or providing other customer services. Read the information in your credit card agreement to see if there are other fees and charges.

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