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  • Evaluating Credit Cards

    Credit cards are a convenience part of most individuals' financial lives. They also are the subjects of intense marketing campaigns from all types of financial organizations. Your mailbox is probably often filled with these offers. Choosing the right credit card and using it wisely are important and can make large differences in your finances.

    What to look for

    The marketing materials in your mailbox can be confusing and sometimes misleading. Choosing the card that is right for you should be dependent on several factors - fees, rates and benefits for using it. Few credit cards will rank highest on each of these factors and you should choose the card that ranks highest based on how you use it. You should also consider the organization providing the card.


    Many cards are offered with no annual fees whiles others charge up to $50 or $60 per year. Ideally, you would want to choose a card with no annual fee. There are also fees that companies charge for late payments. Be sure to check the terms of the credit card agreement, especially if you are occasionally are late with a monthly payment.

    Interest rates

    Obviously, if you carry over balances and are subject to finance charges, you want a card that offers a low rate. Rates can vary by over 10 percentage points and can exceed 20%. You should also be very carefully of low "teaser" rates, or special rates for a limited time if you transfer balances from another card. Another way issuing companies increase the amount you pay is by how they calculate the interest. Be sure to read the details of the agreement.

    Benefits for use

    Using a credit card can bring the rewards of airline mileage, discounts on travel, electronic gifts, discounts on cars and other benefits. A rule of thumb is that the benefits are usually worth about 1% of the charges. If a card with these types of benefits is important, make sure the benefits are those that you will use and that the other aspects of the card do not offset the benefits.

    Simple example

    Assume that Bill Smith is evaluating two cards with the characteristics listed below. Also assume that Bill has an average balance of $3000 on which he pays interest and that he charges $2000 per month.

    Card A - No annual fee, 18% interest, no benefits for using it.
    Card B - No annual fee, 12% interest, mileage benefits for using it.
    Card C - Annual fee of $50, 10% interest, discounts on electronics for using it.

      Card A Card B Card C
    Annual fees $0.00 $0.00 $50.00
    Interest charges $540.00 $360.00 $333.00
    Benefit value $0.00 - $240.00 - $240.00
    Net cost $540.00 $120.00 $110.00

    As you can see, the differences are substantial. The differences become even more pronounced if the unpaid balance or amount of usage is higher.


    Be sure your credit card provides the right combination of fees, rates and benefits. If you do not carry over balances or pay finance charges, you might be willing to accept a card that has high rates and maybe even an annual fee if the benefits were your main focus. However, if you normally pay finance charges or interest, pay extra attention to the interest rate.

    You should evaluate the company providing the card. Be sure their level of service is acceptable. You may also want to consider the benefits of using a card offered by the financial institution where you do most of your banking. Having the convenience of dealing with one institution for all your financial needs can be nice.


    The example above is quite simple and the cards are not meant to represent those offered by any institution. Be sure to read and understand the terms of any credit card before accepting it.

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