Understanding Credit Cards: Part I

The United States is a country consumed with credit cards. Most adults have at least one, nearly all establishments accept them as payment, and chances are that you have an application for a new card sitting in your mail box as we speak. It is crucial that we really understand credit cards and our options.

There are three main types of credit cards:

1. Bank Cards Common cards that are issued by banks and credit unions, including Visa, MasterCard, and Discover. They are the most widely accepted credit cards in the U.S.
2. Travel and Entertainment Cards Cards that originally were targeted toward more upscale markets but now are accepted many places, including American Express and Diners Club.
3. House Cards Cards that can be used at only at a certain chain of stores, such as an American Eagle or JC Penney card.
   

In addition, certain bank cards also are called affinity cards. Such cards contain both the emblem of the particular card company (such as Visa), as well as the emblem of an organization like a sports team or college. Such cards are becoming increasingly common because they tend to benefit both groups involved. The credit card company will gain customers through group loyalty, while the organization itself will get a small financial benefit.

Credit cards also may be considered corporate cards, with the balance charged to a business rather than to an individual.

Credit Card Considerations

There are three general features of credit cards that you should consider before deciding to apply for a new card: interest rate, annual fee, and grace period.

The interest rate, or the Annual Percentage Rate (APR), is the percentage of your balance that is added to your account on a yearly basis until the debt is paid. Interest is charged per month, the rate of which can be calculated by multiplying the APR by the card balance and dividing by 12. Interest rates vary greatly, and might be anywhere from 8 to 21.9%.

There are both fixed-rate and variable-rate interest rates. With fixed-rate interest, the rate is the same each month, but will be changed by the bank every year or so as it sees fit. With variable-rate interest, on the other hand, the rate will fluctuate from month to month with market prices. There are pros and cons for both options. Fixed-rates allow for stability and the ability to plan for payments that will span several months, while variable-rates sometimes are a bit lower than others.

Annual fees are just what you would expect: a fee charged once per year for use of the card. Bank card fees usually are about $18-20, while travel and entertainment card fees charge $35 or more. They are charged each year on the date on which you originally signed up. Some cards do not charge an annual fee, some waive the fee the first year, and some even will agree not to collect the charge if you ask before it is due.

The grace period is the time that you are given after the billing date during which you may pay without incurring any extra fees. The grace period varies between cards, and may be an important consideration for some cardholders.

Go to Part II of this article.