Credit Card Debt, Compare Credit Cards

Smart consumers comparison shop for credit, whether they’re looking for a mortgage, an auto loan, or a credit card. When you’re looking for a credit card, be sure to compare credit cards and consider the costs and terms. They can make a difference in how much you pay for the privilege credit card debt. We’re fans of the following:

  • Discover®: Several cards to choose from (Platinum, Titanium, and Student) and even some cards with dogs, wildlife and sports teams, if you’re into that sort of thing.
  • WorldPerks® Visa®: A good partnership program that earns you airline points and other rewards every time you use the card.

Key costs and terms to consider are the annual percentage rate (APR) for goods and services as well as for cash advances, the annual fee, and the grace period. Also compare cash-advance fees, late-payment charges, and over-the-limit fees.

Besides looking at these costs and terms, think about your typical bill-paying behavior. Do you pay your outstanding balance in full each month? Or do you usually carry over a balance? Compare credit cards to match a plan to your needs.

Credit Card Interest Rates

Credit card issuers offer variable-rate, fixed-rate, and tiered-rate plans. For variable-rate credit card plans, the interest rate is calculated according to a formula. Some of the most commonly used formulas are the prime rate; the one-, three- and six-month Treasury bill rates; the federal funds rate; and the Federal Reserve discount rate. Most of the indexes are published in the money or business section of major newspapers. If the index rate used for your credit card changes, the rate on your card will, too.
The margin is a number of percentage points chosen by the credit card issuer. The card issuer also chooses the multiple.

The interest rate on a fixed-rate credit card plan, though not explicitly tied to changes in another interest rate, also can change over time. The card issuer must notify you before the “fixed” interest rate is changed.

A tiered interest rate means that different rates apply to different levels of the outstanding balance (for example, 16% on balances of $1 – $500; 17% on balances above $500).

Some card issuers may have a policy that raises your interest rate if you make late payments. For example, if you make 2 late payments within 6 months, the issuer may raise your interest rate from 18% APR to 24% APR. If such a penalty rate applies to your card, the issuer must include a notice in the solicitation materials.

Card issuers may also charge different rates for different types of transactions. For example, the card may carry one rate for purchases of goods and services, another rate for cash advances, and still another rate for balance transfers.

How Much Will You Pay?

The finance charge–that is, the dollar amount you will pay to use credit–depends on your outstanding balance and the periodic rate in your credit card plan:

What Is the Outstanding Balance?

The outstanding balance can be calculated in several ways, and the method of calculation can make a big difference in the finance charge you will pay:

Average daily balance method including new purchases. The balance is the sum of the outstanding balances for every day in the billing cycle (including new purchases and deducting payments and credits) divided by the number of days in the billing cycle.

Average daily balance method excluding new purchases. The balance is the sum of the outstanding balances for every day in the billing cycle (excluding new purchases and deducting payments and credits) divided by the number of days in the billing cycle.

Two-cycle average daily balance method including new purchases. The balance is the sum of the average daily balances for two consecutive billing cycles. One daily balance, that for the current billing cycle, is calculated by summing the outstanding balances for every day in the billing cycle (including new purchases and deducting payments and credits) and dividing that total by the number of days in the billing cycle. The other daily balance is that from the preceding billing cycle.

Two-cycle average daily balance method excluding new purchases. The balance is the sum of the average daily balances for two consecutive billing cycles. One daily balance, that for the current billing cycle, is calculated by summing the outstanding balances for every day in the billing cycle (excluding new purchases and deducting payments and credits) and dividing that total by the number of days in the billing cycle. The other daily balance is that from the preceding billing cycle.

Adjusted balance method. The balance is the outstanding balance at the beginning of the billing cycle minus payments and credits made during the billing cycle.

Previous balance method. The balance is the outstanding balance at the beginning of the billing cycle.

Depending on the balance you carry and the timing of your purchases and payments, the average daily balance method excluding new purchases, the adjusted balance method, and the previous balance method tend to result in lower finance charges than the other balance-calculation methods.

What Is the Periodic Rate?

The periodic rate is the rate you are charged each billing period. Usually the periodic rate is the monthly interest rate, calculated by dividing the card’s APR by 12. If your card has different rates for different types of transactions, then different periodic rates will apply to those balances. For example, if your card has a 12% APR on purchases, the periodic rate for purchases is 1%; and if your card has a 24% APR on cash advances, the periodic rate for cash advances is 2%.

The Right Card for You

While the outstanding balance and the periodic rate are important factors in choosing a credit card, they shouldn’t be your only considerations. Other plan features may be more important to you, depending on how you use the card. For example, if you don’t always pay your monthly bill in full, you’ll probably be more interested in a card that carries a lower APR for your credit card debt. On the other hand, if you always pay your monthly bill in full and enhancements 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.

The grace period is the number of days between the statement date and the due date during which you can pay your bill without incurring a finance charge. The card issuer may refer to the beginning or ending point of the grace period and tell you about any conditions that apply. For example, the issuer may say you have “25 days from the statement date, provided you have paid your previous balance in full by the due date.” Keep in mind that the statement date is not the date on which you receive the bill; it is the date on which the issuer prepares the statement, which may be a week or two before you actually receive the bill in the mail.

Here are some tips to compare credit cards. Certain key pieces of information must be included in all solicitations or applications for credit cards.

APR for purchases
The interest rate you will pay, on an annual basis, if you carry over balances on purchases from one billing cycle to the next. If the card has a temporary introductory rate, the rate that applies after the temporary rate expires is also stated.

Other APRs
The interest rates you will pay, on an annual basis, if you get a cash advance on your credit card, if you transfer a balance from another credit card, or if the card issuer applies penalty rates. (More information on the penalty rate may be included outside the disclosure box–for example, in a footnote.)

Variable-rate information
If the card has a variable rate instead of a fixed rate, this section will tell you how the variable rate is determined. (More information may be included outside the disclosure box–for example, in a footnote.)

Grace period for repayment of balances for purchases
The number of days you have to pay your bill in full without triggering any finance charges. With most plans, the grace period applies only to purchases; cash advances and balance transfers may start accruing interest immediately.

Method of computing the balance for purchases
The method that will be used to calculate your outstanding balance if you carry over a balance and will pay a finance charge.

Annual fees
The annual fee (or other periodic fee) the issuer charges for you to have the card. You may have to pay this fee even if you never use the card or don’t have credit card debt.

Minimum finance charge
Any minimum or fixed finance charge that could be imposed during a billing cycle. A minimum finance charge usually applies only when a finance charge is imposed, that is, when you carry over a balance.

Transaction fee for cash advances
Any charge imposed when you use the card for a cash advance. If the card charges transaction fees for purchases, these fees will also be stated here.

Balance-transfer fee
A fee for transferring balances from one card to another, if any.

Late-payment fee
The fee imposed if your payment is late, if any.

Over-the-credit-limit fee
The fee imposed if your charges exceed the credit limit set for your card, if any.