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Credit Card Primer

Shopping around for a credit card can save you money on interest and fees. You’ll want to find one with features that match your needs. This information can help you

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.”
  • 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).