There are basically three types of cards: credit, charge, or debit. Each type can be used to pay for products and services. If you want to apply for a new credit card, it’s important to compare fees, interest rates, finance charges, and benefits.
You can use a credit card to buy things and pay for them over time. But remember, buying with credit is a loan — you have to pay the money back. And some issuers charge an annual fee for their cards. Some credit card issuers also provide “courtesy” checks to their customers. You can use these checks in place of your card, but they’re not a gift — they’re also a loan that you must pay back. And if you don’t pay your bill on time or in full when it’s due, you will owe a finance charge — the dollar amount you pay to use credit. The finance charge depends in part on your outstanding balance and the annual percentage rate (APR).
Charge cards are often confused with credit cards, but they are actually different. While charge cards extend credit to you from the issuer the difference is that you’re required to pay the full balance at the end of the month. Some charge cards also have an annual membership fee. Charge cards are typically associated with American Express; many store chains often issue their own charge cards as well which can only be used at that store.
A debit card is linked to your checking or savings account. Each time you use the card, money is automatically removed from your checking or savings account to cover the purchase. Many debit cards have the same purchasing flexibility as credit cards.
When applying for credit cards, it’s important to shop around. Fees, interest rates, finance charges, and benefits are very different. And, in some cases, credit cards might seem like great deals until you read the fine print. Therefore, be sure to review the following:
Annual percentage rate (APR): This measures the cost of credit, expressed as a yearly interest rate. It is disclosed before your account is activated, and appears on your account statements. The card issuer also must disclose the “periodic rate” which is the rate applied to your outstanding balance to figure the finance charge for each billing period.
Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators change. These plans are called “variable rate” programs. Rate changes raise or lower the finance charge on your account. If you’re considering a variable rate card, the issuer also must tell you that the rate may change and how the rate is determined.
Before you become obligated on the account, you also must receive information about any limits on how much and how often your rate may change.
Grace period: This is the number of days you have to pay your bill without incurring a finance charge. For example, the credit card company states you have 25 days from the statement date, provided you paid your previous balance in full by the due date. The statement date is on the bill.
The grace period usually applies 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 your card includes a grace period, the issuer must mail your bill at least 14 days before the due date so you’ll have enough time to pay.
Annual fees: Many issuers charge annual membership or participation fees. Some cards take the fee in monthly installments.
Transaction fees and other charges: Some cards charge a fee if you use it to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card.
Customer service: Be sure to look for a 24-hour toll-free telephone number so you have someone to contact should the need arise.
Unauthorized charges: If someone else gets ahold of your card and uses it, you can be held responsible for up to $50 per card. If you report the loss before the card is used, you will not be responsible for any unauthorized charges. If your card is lost, report the loss as soon as possible.
If you choose a card that has a low-fee, always pay on time, and carry no debt from month to month, then charging is free. Look for a card with a good rewards program and then you can even come out ahead by using your credit card.