"I didn't pick my credit cards--they picked me," says Los Angeles attorney Stanley Clark, who has five bank cards. Three of the five "just came in the mail," Clark says. Most involve annual fees, two have relatively low interest rates--"14 maybe, or 16-point-something"--and all carry charges, although "at least once a year, they come to a zero balance."
Few people know that much about the status or terms of their cards, or how to choose among them, or even how they work. Many don't even understand that they involve an actual loan over a period of time, and not just a finance charge on an unpaid balance.
Here's the gambit: Not paying a bill fully on time triggers a retroactive loan--that is, a finance charge is applied not just on the unpaid balance but also on all new purchases made since the last billing date. Thus the time between billing date and due date is a grace period only for those who pay in full.
As in any loan, a consumer's most obvious consideration is the interest rate--no bargain at a typical 18% to 20% a year. The so-called revolving customer, who turns over some unpaid balance into another month's worth of loan, should therefore look for a low or variable rate, or one "tiered" to provide lower rates for qualifying customers.
The interest rate is of no interest to the "convenience" user, who pays in full every month. "I'm not interested in borrowing money," says Los Angeles lawyer Ann Gold. "I just like the convenience of writing just one check and having somebody else keep the tab for me. I look for a cheap annual fee." Or better yet, none.
Most credit card guides focus on interest rate and annual fee. The Consumer Credit Card Rating Service guide published by the Nilson Report, a Santa Monica-based newsletter for the credit card industry, even advises consumers to use a low-fee card for purchases they plan to pay off right away and a low-interest card for purchases they want to carry over time. Otherwise, says the guide (available for $10, P.O. Box 5219, Ocean Park Station, Santa Monica, Calif., 90405), all new purchases are automatically added to an outstanding balance and immediately assessed interest.
The other major guide publisher disagrees. "It's not the real world," says Elgie Holstein, director of Bankcard Holders of America ($2.95 for two guides; 333 Pennsylvania Ave. S.E., Washington, D.C., 20003) "People don't always know what they're going to pay off and can't keep in mind which card to use for what."
Unfortunately, there's even more "to figuring out what a card really costs you, beyond just the red flag of an interest rate," says David Robertson, vice president of marketing for the Nilson Report. The ordinary consumer can't even figure out his own spending patterns and typical interest costs without the help of a computer. "This loan," Robertson says, "isn't a book of coupons for a set payment. You're always adding new money and paying some off."
Most guides also note whether cards offer a grace period (usually 25 days) between the billing date and the payment-due date. Many cards with low interest rates and no annual fees look like bargains, but lack a grace period, so that interest is assessed on purchases as soon as they're made, whether or not the bill is fully paid.
Some card issuers tack "transaction" fees on all cash advances (which already incur finance charges from the moment withdrawn). Some add "usage" fees any month their card is used or perhaps any time it's paid in full (thus getting something extra from convenience users). Many add late fees (up to $25 per month) if the due date is passed, and other fees for exceeding a credit limit.
Associated obligations may also cut the bargain. Getting a no-fee, low-interest card may require depositing a certain amount at the bank. American Express's new "Optima" card, seemingly stiff competition for bank cards at 13.5% introductory interest and $15 annual fee, requires a regular American Express card membership ($45). Starting next summer, it will offer a variable rate at 1.8 times the prime rate (currently 9.25%).
Finally, the cards rated best buys may be least available. Many of Bankcard Holders' recommended cards are only for residents of certain states. Those "accepting applications nationally" often have no grace periods, and they may "accept" out-of-state applications but reject 70% of the applicants, Robertson says, "usually because they're small banks with a limited amount of money for credit-card loans."