Finance 101 - Credit Card

Don't jump at that credit card offer
You might be surprised to find lower credit limits and higher interest rates and fees.
By Gerri Willis, CNN personal finance editor
May 20, 2009: 12:39 PM ET

NEW YORK (CNNMoney.com) -- President Obama has called on Congress to pass credit card reform by Memorial Day. The bill, expected to pass shortly, will make it harder for credit card companies to hike rates and fees starting early next year. But that bill doesn't guarantee that a new card offer is in your best interest. Here are some things to look at when deciding to open a new credit card account.

We all know the term APR (annual percentage rate) but the number consumers should really be paying attention to is "effective APR."

According to Greg McBride, senior financial analyst at bankrate.com, explains, "An effective APR represents your total cost of credit. Now, keep in mind, this may be more than just the interest rate. If you're paying an annual fee, if you incurred a balance transfer fee when transferring the balance to that card ... those are costs that will add to the interest rate that you're effectively paying, effectively raising the cost that you pay on that balance."

Your "effective APR" is unique, different from everybody else's. Here's an example of how to calculate your "effective APR" from Bill Hardekopf at lowcards.com.

Our hypothetical guy -- let's call him Tony -- applied for a credit card with 0% APR for one year.
He spent $1,000 on the card and decided to make only the minimum payments for that first year.

Later, he took out a $2,000 cash advance -- not realizing there was a cash advance fee -- and that cash advances are at a much higher rate than purchases.

Then Tony missed a couple payments, which triggered two late fee charges. It also triggered a default rate -- and his card rate was raised to 29.9%. He eventually paid off the entire card and closed the account. So Tony was tempted by the 0% introductory offer, but it cost him dearly.

Let's add up the total costs to the card:

• $75 interest on purchases
• $379 interest on cash advances
• $60 cash advance fee
• $78 late charge fee

So he spends $592 on all these extra costs, which makes his "effective APR" 19.7% on a card that was supposed to be 0% APR. Be aware of:

• Introductory rates
• Payment schedules
• Cash advance fees
• Late fees
• Default rates

You really have to sit down and crunch the numbers to determine what is the best card for you. Remember, some of these expenses are easily managed. Make your payments on time, keep an eye on your rate schedule and avoid cash advances whenever possible.

Bilibala's comments:

As a credit card holders, if you settle all the balance (not just min. payment) every month on time, with a credit card that do not charge annual fees, I think no one can take any advantage from you and I like cash rebate as the reward program.