Choosing a Credit Card

Not all credit cards are alike. It pays to evaluate your options when choosing a credit card. Each of the following factors may contribute to the total cost you'll pay for your credit card. Depending on how you use your card, each of these factors could result in higher or lower costs to you.

Credit Limit - the maximum total amount you may charge on your credit card. In addition to purchases, the credit limit includes cash advances, balance transfers, fees and interest charges. The credit limit generally depends on your income and credit history. If you exceed your credit limit, your credit may be denied.

Annual Percentage Rate (APR) - the interest rate and any other costs of credit (stated as a yearly rate).

  • The credit card issuer may charge a different APR for different types of transactions, for example, 12% APR for balance transfers from another card or cash advances, 11% APR on balances carried forward from the prior month, and 10% APR for new purchases made that month.
  • A tiered APR means that the interest rate will rise or fall as your account balance goes up or down. This may be important if you plan to carry a higher balance.
  • Some companies charge a Penalty APR, where you pay a higher rate if your payment is late or you exceed your credit limit.
  • Some issuers also offer an Introductory APR, with a higher APR in effect after the introductory period.
  • The APR may be fixed, where it doesn't change, or variable, where it changes (usually based on the Prime Rate or the Treasury Bill rate).

Look for a card that has the most favorable APR for the type of transactions you'll do the most, and for the way you plan to pay - whether you'll carry a balance or pay it off in full each month.

Grace Period - the window of time during which you can pay your bill in full without incurring any interest charges. For most cards, the grace period applies only to new purchases, and not for cash advances or balance transfers.

Interest Charge - the dollar amount you pay for using credit. The amount depends on your outstanding balance and the APR. Different companies use different methods of calculating interest charges.

If you won't use your card much, choose a card with no minimum interest charge.

Fees - costs other than interest charges. Fees vary by company, and may include:

  • Annual fee - You pay for having the card. The annual fee is usually a set dollar amount, such as $30 per year. It may be charged annually, or monthly.
  • Late-payment fee - Charged if your payment is late (even by one day)
  • Over-limit fee - May be charged if you exceed your credit limit
  • Cash advance fee - Charged for using your card to get cash. May be either a flat fee, such as $3, or a percentage of the cash advance, such as 3%.

Look for a card that offers the lowest fees for the types of transactions you do the most. For example, if you'll have a lot of cash advances, it may be worth paying an annual fee to get a card that offers lower cash advance fees and/or a lower APR on cash advances.

Incentives - Some cards offer rewards on the purchases you make, such as frequent flier miles, telephone minutes or rebates.

If you plan to use your card a lot, an incentive card may offer greater value for the money you're spending. Most have an annual fee.

How To Get Information About Your Card

Every credit card issuer is required to provide a disclosure that includes the following items:

  • APR for purchases
  • Other APRs including rates for cash advances, penalties and balance transfers
  • Variable rate information, if the APR is variable
  • Grace period
  • Method of computing interest charges
  • Annual fees
  • Minimum interest charge
  • Transaction fees

Tips for Choosing Credit Cards Wisely

  • If you plan to use your card for cash advances, be aware of all fees that may be charged. You may pay a higher APR, plus a fee for the transaction - and you may not have a grace period for cash advances.
  • If the card offers a low introductory APR, be aware of what the APR will be once the introductory period expires. That low intro rate may cost you more in the long run, especially if you carry a balance for a while. And what happens to that rate if you miss a payment?


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