Opening a new credit card can be exciting! It feels good to be approved and the potential for welcome bonuses can make spending more appealing. According to WalletHub, there were 182 million credit card holders in 2018 and this is projected to continue growing. Over 80% of U.S. adults reported having at least one credit card in 2019 with an average of just over three per adult. This means that most adults will face applying for a credit card at some point in their life and it’s important to know what to look for. Let’s go over some features that affect both the usefulness and the cost of a credit card.
The Schumer Box
The first place to look when considering a credit card is the Schumer Box. Named after U.S. Senator Chuck Schumer, this box is contained within the disclosures for paper applications or the terms and fees link for online applications. I like to think of this as the nutrition facts of a credit card because it’s required to be formatted the same way for every credit card. It’s also required to outline all of the potential costs for any credit card in an easily readable format. You can quickly find the interest rates for different transaction types, the fees for making a late payment, and any other fees that might pop up. Every Schumer Box also outlines how to avoid paying interest (paying the statement balance each month).
You’ll notice that most credit cards will have four interest rate types listed (and sometimes an introductory offer). These interest rates may be expressed as a range, meaning your assigned rates will be based off your credit score. Additionally, some rates are fixed, so they do not change; others are variable, meaning they fluctuate when the Federal Reserve raises or lowers interest rates.
The first rate listed is for purchases. This rate applies only to purchases you’ve made with your card. This rate is listed as an annual percentage rate (APR) and applies when you don’t pay your entire statement balance by the due date.
The second is the cash advance APR. This applies if you advance money off the credit card by making an ATM withdrawal or transferring money to your account from the credit line. Cash advances are often accompanied by additional fees and the interest charges generally begin from the date you advance the money.
The third interest rate is for balance transfers. This applies if you move money from another credit card or loan to the new credit line. For example, maybe I have a credit card charging a high interest rate and I want to move it to a new card with a lower APR. Interest charges generally begin as soon as the transfer is completed and there may be an additional fee to move the money.
The final rate is the penalty APR. This generally kicks in if the account is not handled properly, such as making a late payment. Details about when this would occur should also be listed in this part of the Schumer Box.
Credit card fees can be easy to avoid, but they have a direct impact on cost and usefulness. Late fees are the most common fee and generally apply if you haven’t made at least the minimum payment by your monthly due date. Some financial institutions and credit card companies will give you a grace period to make your payment without a late fee, but you’ll want to avoid this when possible.
A fee that’s common for rewards cards is an annual fee or membership fee. This fee is charged every year that you have the account open (often waived the first year). You’ll want to be sure that the rewards or use you get from the card offset the annual fee, otherwise you’re just paying money to have the account. Be sure to check out any other fees that may apply and weigh their potential cost.
Another consideration when determining a credit card are the potential rewards or cash back. Some cards have a flat rewards rate, some have consistent rewards categories of varying levels, and others have rotating categories (usually changing each quarter) to earn rewards. Some cards may even offer cash back bonuses throughout the year for spending above a certain threshold. Be sure to fully evaluate the rewards and compare the categories to your current spending habits. You don’t want to find yourself having to spend more than you want in order to meet rewards criteria. Again, make sure the rewards you’ll earn can offset any annual fees that might apply.
Another major consideration for opening a credit card should be the possible credit limit. While many companies will decide your credit limit based on your budget and credit history, you’ll want to know if there is a minimum or maximum credit limit. A minimum limit means your budget and credit history will need to qualify you for at least that dollar amount. A maximum limit means they cannot offer a limit larger than that amount. Having a lot of credit cards with low limits can make building credit a challenge. Retail credit cards are known for offering low credit limits, high interest rates, and sometimes cannot be used outside of that store.
Finding the right card for you
Now that we’ve covered the major features and considerations for selecting a credit card, it’s time to consider the right card for you. Think about your spending habits and what makes the most sense. Do you want a lower interest rate to avoid paying much interest? If you like earning money back, a cash back card may be right for you (making sure to consider any annual fees). If you travel a lot, an airline rewards card might make more sense for you. Maybe your goal is to pay off some high interest debt by transferring the balance to a card with a lower APR (some cards even offer low promotional rates for balance transfers).
Whatever you choose, make sure to consider all the options available and avoid making a decision based on impulse. Saving some quick money in the checkout line for opening a store credit card or earning a hefty welcome bonus can be enticing; however, always make sure that a credit card is truly right for you before you apply.