Applying for a credit card

[dunno001]

Like others in here have said, paying off the balance every month is best. However, I know quite a few people who said they would do that when they got a card, then... it didn't happen. You know your self-restraint better than any of us, but I would advise to safeguard against this, just in case.

First thing to decide is what card you want. There are 5 big names in the USA to look for: Visa, Mastercard, American Express, Discover, and Diner's Club. You might not have heard of that last one; its acceptance is low enough that it's fairly easy to ignore. I will also recommend against American Express, for reasons I'll get to later. So this leaves Visa, Mastercard, and Discover. Of these 3, Discover is the least accepted, but the easiest to research- it goes through 1 issuer. For Visa and Mastercard, there are several issuers of these; the difference between the card name is pretty much non-existant, but the issuer may make a big deal. I will warn you against Capital One; they seem to have enough small print to make all their money off of fees, fees which you will pay even if you do pay the card off every month.

If you carry a balance, there are 2 main things you want to watch for: minimum finance charge, and interest rate. The interest rate is more likely to play a bigger role; the rate quoted is as a percentage. It is true that if you pay the whole thing off every month, you won't pay this interest, because you are in what is considered a 'grace period', where interest is not charged. (This is typically about 20 days, if your last statement balance was 0.) You will lose this grace period if you ever carry a balance, and interest is calculated on a daily basis. (If the interest rate were 15%, using 15/365 (~0.041%) is the percentage that would be added to your bill on every day. (On a $100 balance, this would be 4 cents per day... but remember that those cents are being added to that $100, which will eventually push things to 5 cents, etc on upward.)

So you want to look for a low interest rate. This became much harder in the past few years; I've closed a few of my cards because they wanted to raise my interest rates significantly. (Sorry, I don't accept my rate going from 7.24% to 14.24%.) Since you have no credit history at all, you may not be able to be picky on this. I would say to try to target under 15%, but do not accept over 20%. (As a new person, my guess is that you should have little difficulty getting about 18%.) Once you've had this card for a few years, and established credit, you may be able to ask the card provider for a lower interest rate. (You HAVE been paying it on time and not going over, right?)

There is one other thing to look at with the interest rate- there will be a word describing it, either 'fixed' or 'variable'. Most cards are variable; the interest rate is mapped to a prime rate published quarterly. They will tell you what source they use for the prime rate, and will probably tell you that it is prime some%. Right now, the prime rate is in the gutter; these variable rates aren't going to go down anymore. When the economy turns back around, prime, and thus, your interest rate, and your minimum payment, will go up. Conversely, with a fixed rate, unless you do something stupid, your rate is what it is. If the economy gets better (or worse), your rate won't change. Note, though, that a fixed rate is typically higher than a variable rate, to counter the fact that they can't make more money when things turn around.

So you've gotten a great rate, but you just couldn't quite pay off the card. This is where the other thing I said to look at comes into play- the minimum finance charge. We'll take for example, that 15% card, and you have a $50 balance on it. Using the numbers, the interest should be about 60 cents. However, the card has a minimum service charge of $1. This means that next month, your bill will not be $50.60, it will be $51, because your interest did not make up enough to cover the minimum. Many cards these days have these ranging in the $1-2 range. And for someone who's just starting out, and likely to have a lower balance, this can make things add up much quicker.

Whether or not you carry a balance, though, there is one other thing to watch out for: monthly/annual fees. Avoid these fees like the plague. Not too many cards do this, but this is where my recommendation against American Express comes in- most of their cards have an annual fee, usually between $50-100. And you will be billed this in the first month you have the card. It's acceptance is also fairly similar to Discover, so I really can't recommend looking for one without said fee. (This is also one of the many fees that Capital One likes to add to the fact later, hence my suggestion to avoid them.) You should have little trouble getting a card without this fee; more often than not, these cards are for those who have legitimately bad credit, and is used by the lenders to try to offset some of the risk.

If it means anything to you, by the end of the year, I'll be down to 1 active credit card- a Discover. For those places that only accept Visa and Mastercard, I'd suggest a debit card there also, which has been brought up.