Whether you're using them for cash back rewards or rely on them to make ends meet each month, there's no question that credit cards have become an integral part of our lives.
For proof, just look at some of these shocking US credit card statistics (2019) from Experian:
The average person holds more than 3 credit cards.
The average credit score is 675.
The average credit card debt per person is $6,354.
The total amount of credit card debt in the US is $815 billion.
With that kind of popularity, it's no wonder why banks continue to flood us with credit card offers! You're bound to see everything from rewards credit cards offering 6% cash back on purchases to cards that let you pay 0 interest on your card balance for up to 21 months on a weekly or sometimes daily basis.
So what's real and what's just a bad deal when it comes to credit card offers?
Here's are some tips to navigate through the marketing ploys and pick the right credit card for you.
1. The Introductory Rate or "0 interest" Offer
Well known among those looking to consolidate their credit card debt onto a balance transfer card, the introductory rate (or "teaser rate") is an attractive, below-market interest rate (ranging from 0% to 4%). Card issuers will often offer this low interest rate for new card customers on balance transfers, new purchases or sometimes even cash advances.
While the intro rate can be tempting, know that it doesn't last forever. In fact, the special rate typically expires between six to 21 months after your card account is opened, so be sure to read the fine print and terms on the card to see what the regular annual percentage rate (APR) will be once the initial introductory period ends!
2. Variable APR vs Fixed APR
If you don't pay your balance in full by the due date, you'll be charged interest on the remaining balance. How much interest you pay is determined by the annual percentage rate (APR) on the card.
If you pay the full balance on your credit card every month, you won't have to pay any interest on your balance ($0), and can ignore APRs.
Most credit cards carry a variable APR, determined largely by the prime rate, which is the interest rate commercial banks charge their most creditworthy customers (usually corporations). For example, if a bank is offering a credit card at "prime plus 5" and its prime rate is 6%, then the bank is essentially offering customers an 11% loan (6% + 5%).
As the prime rate moves with broader interest rates that the Federal Reserve controls, your variable APR will move along with it. In other words, don't expect the APR you signed up for when you applied for the card to stick around forever.
On the flipside, a credit card with a fixed APR locks in your rate so that it does not fluctuate with changes to the prime rate on which it is pegged. While it's preferable to have a card with a fixed APR, these cards are few and far between, though you may be able to ask your local credit union if they offer them.
3. Credit Cards for Bad Credit
Everyone deserves a second chance. At least that's the premise behind credit cards for those with bad credit.
The most common type of these cards is known as the secured credit card. These cards are dubbed "secured" because it means that the cardholder must deposit money onto the card upfront as collateral before they can access the credit via the card. Like training wheels, this ensures low risk of default for the borrower and the card lender.
Besides secured cards, card issuers also offer unsecured credit cards designed for consumers with bad credit. These cards come with low credit limits and high APRs that can be up to 20% or higher, which encourage the cardholder to borrow small amounts at a time and not carry a balance as they rebuild their credit score.
4. Rewards and Cash Back Credit Card Offers
Rewards credit cards are tied to charges for hotels, rental cars, air travel, grocery and gas purchases, etc. The premise is that the more things you buy, the more "points" you earn in return for free hotel rooms, bonus rental car use, free airline tickets -- you name it.
But don't get carried away: Many of these incentive-based cards come with high APRs north of 15% and or big annual fees just to have them open. If you don't trust yourself to spend responsibly or you expect to carry a balance on one of these cards, it's best avoid their high APRs and go for a low-interest balance transfer credit card instead as you pay down your debt.
But if you're using these cards to collect rewards points while paying off your balance every month, they can be a great deal.
Comparing Credit Card Offers
Now that you've been tutored on the basics, here are the most important areas to scrutinize when weighing the pros and cons of a credit card offer:
What's the interest rate? Compare fixed and variable APRs. If you think interest rates will remain stable, you might want to opt for the lower variable rate. Remember, that's a risky option. If interest rates go up, you lose.
Thanks to the more recent credit card laws, the companies that issue cards can't raise rates on existing balances during the first year unless a prior intro rate expired, the index on a variable APR increased, or you were 60 days late in paying your bill. If your rate rises because of a late payment, the bank is required to restore it to its lower rate once you've made six consecutive monthly payments, on time of course.
Is there an introductory rate? If so, what is it and how long does it last? If the introductory rate is more than 10% and doesn't last at least six months, forget it.
Is there an annual fee? A credit card annual fee is a yearly fee -- typically ranging from $15 to $300 -- charged by the credit card company for the privilege of letting you have the card. Don't agree to pay much more than about $50. If you can, opt for a card with no annual fee.
What's the late fee? If you make a late payment, what will you get charged? The average credit card late fee is about $35, but you can find cards with no late fees or "penalty APRs" -- the increased rate card issuers can charge if you miss your payment due date.
What's the over-the-limit fee? The average fee for charging over your card's credit limit is $37. Look for cards that don't impose a charge of this kind. Some cards will notify you if you've gone over your limit without hitting your pocketbook with a penalty.
Are there any hidden fees? Some cards charge balance transfer and account termination fees. Know what your cards charge and opt for cards with a 3% balance transfer fee or less and no termination fees.
How is your interest calculated? Beware of fishy interest calculations. There are many ways a card issuer can calculate interest owed. One of the shadiest tricks is to use a late payment as a reason to jettison the interest-free period for new purchase transactions and then calculate the interest as far back as the original purchase date.
Another dodgy maneuver is to charge daily interest on the full purchase amount even if partially repaid on deadline.
As you look through the plethora of credit card options available today, just be sure to always read the terms on your credit card statement and preferably before you apply for a credit card at all!