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By Carlo J. Silvesti, CPA

Today, we buy more and more goods and services online using apps and vendor websites. Often the purchase of these goods and services requires us to use credit cards. As a result, it has become more important than ever to understand the details of our credit cards and how we use them so that we can better manage our debt.

The first step in managing credit card debt is to select the appropriate credit card for your needs. So, before making a purchase, answer these two questions:

• Are you going to carry a balance each month or pay it off in full?
• Is the credit card your go-to card for everyday purchases, or do you use the card for emergencies?

Once you answer these questions, you will need to make sure you read the fine print of the credit card agreement and then look at five key areas to determine which basic terms and conditions fit best with the answers you provided to the questions above.

Interest Rate

Find out if the annual percentage rate (APR) is fixed or variable. Most credit card interest rates are several points above a base rate, such as a prime rate. The better your credit rate, the fewer the points above the prime rate that will be added to establish your interest. If the terms are six points above the U.S. federal prime rate, which today is about 4 percent, your rate will be 10 percent. Your interest rate will increase as the prime rate increases. Be aware that you may have one interest rate for purchases and another rate (usually significantly higher) for cash advances. Sometimes you may get a lower rate for balance transfers from another card for a short period of time, usually six to nine months.

If you plan on carrying a balance, you will want to use a credit card with the lowest interest rate. If you plan on paying it off in full, interest rates become less important and other factors become more important, as we will see below.

Credit Limit

This is how much you are allowed to charge or borrow on your card. Do not take the card up to its maximum.

If you plan on carrying a balance, and this is your everyday card for purchases, you will need to monitor your purchases to see that you have not exceeded your credit limit. If you exceed your credit limit it will negatively impact your credit score as well as subject you to over-credit-limit fees and potentially higher interest rates. On an emergency card, be sure you have a sufficient credit limit to be able to handle the emergency.

Fees and Penalties

Credit card companies have become creative about developing fees and penalties. Here are some of the more common charges:

Annual Fees – Each year the credit card company may charge you between $15 and $100. Avoid these cards because there are many credit card companies that do not charge an annual fee.

Late Payment Fees – These can run $35 or more. This is charged when you do not make the minimum monthly payment on time. You should strive to make more than the minimum monthly payment to both reduce your interest charges and pay off your balance sooner. Making higher than the minimum monthly payment also will give you more credit availability for your everyday purchases and more credit availability for your emergency card. Note, your interest rate can increase if you make a late payment.

Over Credit Limit Fees – If you exceed your credit limit, you will be charged $35 or more for going over the limit. Your interest rate can increase, and the credit card company can refuse to process your credit card charges.

Balance Transfer Fees or Cash Advances – There is a fee attached to amounts transferred, usually between 2 percent and 5 percent. These transfers could carry a higher interest rate.

Regardless of how you answer the two questions at the opening of the blog, it is good financial practice to avoid credit cards that charge an annual fee. Always make your payments on time, because failing to make them on time or exceeding your credit limit will result in additional fees as outlined above, may significantly increase your interest rate, and could potentially drop your credit score.

Method of Interest Calculations

The most common calculation method is the average daily balance. The daily balances are added together and divided by the number of days in the billing cycle. Be wary of any different methods of calculating interest.

Rewards

Look for a program that meets your needs and lifestyle, such as cash back or travel rewards. Make sure they are easy to earn and redeem. Be aware of any restrictions or other terms on the reward.

If you pay off your card fully each billing cycle, the interest calculation method and interest rate become less important, as you will not be paying interest. Here, the rewards being offered will be a more significant factor in deciding which credit card to choose.

If you are keeping a balance or using a card for emergencies, then the method of interest calculations and the interest rate become critical factors in your decision of your credit card choice. Rewards would be less significant in the decision in this case.

Watching your spending habits and selecting the best card that meets your personal needs by reviewing the point outlined will help you have credit cards that work for you rather than you working for the credit cards.

Carlo J. Silvesti, CPA, is an associate professor of accounting at the Gwynedd Mercy University School of Business and Education. Prior to joining Gwynedd Mercy University, Silvesti served as a CFO and controller for 35 years at several small and midsize businesses. He can be reached at silvesti.c@gmercyu.edu.