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Credit Cards: How to Choose a Credit Card

By Edited Mar 1, 2016 0 0

So what really is a credit card? The easy way to describe a credit card is as a tool that permits to make a purchase now and pay later. How much can you spend in total is based on your available credit line. How much do you have to pay monthly depends on the minimum imposed by the bank or your total balance. Credit cards are affected by an interest rate. This is how the lender profits from them and is similar in most ways to how loans are handled by a financial institution. Handling a credit card is a responsibility. You have to be responsible when it comes to paying on time and paying at least the minimum amount of money that the lender is requesting.

Credit cards are nothing to be afraid of. Most adults in the U.S. own one in case of emergency or just for the sole convenience of not having to carry cash on their wallets. There are a lot of different  cards available with the most popular being VISA, Master Card, American Express, Discover and  First Premier Bank to name a few. So which oneis the best for you? It depends on how you spend your money. Does your work or daily activities make you spend a lot of money on gas? Maybe a gas card is better for you. Do you travel a lot by plane? Then a credit card that gives you rewards for your ticket purchases is the one you need.

What is APR and How it Affects You

Credit cards have different APRs. APR stands for annual percentage rate and reflects the cost of credit over a one year period. It is a very useful reference to use when you compare credit card offers. This is essential because the higher the APR the more interest money you will have to pay on your outstanding balance. Interests are calculated on a monthly basis and are calculated assuming that your balance would remain the same for one year then dividing it by 12. For example, you have a balance of $100 dollars and your card has an annual percentage rate of 10%. Percentages are used as decimals in calculations so you have to multiply $100 by 0.10 (This is the decimal number for 10%) equals $10. Then you divide this by 12. The answer is around $0.84. Your account gets addend a balance of $0.84 according to your $100 balance and your APR of 10% that month. The reason why interest is calculated every month is because your balance changes every month or even every day. Most credit cards have annual percentage rates higher than 12%, most of them are near the 20% mark which is a very high rate to have compounding against you. Not to mention that there might be other fees included like annual fees and the like.

As a general rule the lower the APR the lower the interest charges to your account.If you really need a credit card always choose the one with the lowest APR, especially if you plan to use it to buy expensive things. There is a huge difference between having $10000 compounding against you with an APR of 13% than having the same amount of money compounding against you at 20%. The net effect of high interest cards is that if you pay the minimum amount required your payments would be paying mostly the interest generated and little of the principle. In  others words you would be paying for a lot of years thus paying more than double the amount that you bought on credit. In other words, the faster you pay the better. Some cards have a 30 day grace period on all purchase that you can use to pay off what you bought and avoid interest expenses.

Choosing a Credit Card

When it comes to credit cards, rewards are the most appealing of all of the benefits. It really does not matter if you are on the bank, at home, of window shopping at the mall you can come across an offer for a reward credit card. Most of these offers may sound perfect at first but one important to keep in mind is that some people take rewards too seriously and spend more in the end due to higher interest rates and other fees. As with anything related to borrowing money high interest rates should be avoided at all costs. You should first consider the interest when deciding between credit cards then  if there are cards with similar interests you can check if one of them has an added bonus in this case, a reward. However, if you pay your whole balance at the end of each month, there is not concern for interest rates and you could be taking full advantage of the reward program that the credit card you chose provides.

Some other fees that you should keep your eyes on are annual fees. Rewards cards have a tendency to have higher annual fees than regular cards. So what are the rewards offered? Some credit cards have cash back rewards while others have a point system in which you can accumulate points that you can redeem for items when you have enough. There are many variants of these including travel credit cards, and cards that offer you coupons from specific stores. Do not get carried away with just promises, choose the card that best fits your need and not the first one that pops up. You may be surprised to know that there are quite a lot of people that own a card with frequent flyer rewards that do not even travel by plane and get no benefit from it. If the same people had for example, a gas card, the story would be different.

In conclusion, choosing a credit card is no easy task. There are many options available yet, finding a card that suits one's needs requires some research. Always pick the one with the lowest yield and if possible one that has some way of rewarding you according to the things that you tend to buy the most on credit.



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