The Five Most Important Things to Look for In Credit Card Offers

We all get them in the mail: "pre-approved" offers for credit cards.  And sometimes, it might be tempting to consider getting a new card: the terms might be better than the one you have, or you might qualify for a lower APR than the one on your current card.

But what should you look for on the offer?  What's just legalese, and what's important to you as a consumer.  Pay close attention to these five things:

• 1. The APRs, and Not Just the One on Purchases

Right there, at the top of any offer, will be the range of APRs the card offers...but you need to look closely.

For example, a card may have an introductory APR, but after a certain point, it will shift to another APR, usually a variable APR.  This is important because APRs are usually a certain percentage over the Prime Rate, which is three percentage points over the Federal Funds Rate.  If the Federal Funds Rate goes up or down, so will your APR.

And that's not the only APR: most cards will have different rates for balance transfers, cash advances, and as a penalty.  Speaking of which...

• 2. How Is Your Balance Calculated?

Just as important: how is your balance calculated?  For example, some cards will use the adjusted balance method: that is, as you pay down the balance over the billing period, those credits are added to your balance, and the APR is only applied to the remaining balance on your card.  Others will use the previous balance method: everything you charged in the last month is simply charged as the balance.  You need to know how this is calculated and why.

• 3. The Penalties, and When They Kick in

Look closely at the penalty APR, which tends to be double the usual rate.  When do you start getting charged the penalty?  When does the penalty APR stop being charged?  And, of course, what is it?  Sometimes the penalty APR won't drop until after four to six payments.  Sure, nobody plans to miss a payment, but sometimes it happens.  So know what you're in for before you sign up.

• 4. The Due Date

This is obviously important: when is the bill due?  When the billing cycle closes, how long do you have to pay the bill in full before you're charged interest?  Get a sense of the billing cycle, and when you'll be expected to pay up.

• 5. The Fees

Look closely at the fees.  Sure, there's the annual fee...but look closely at other fees.  Is there an account set-up fee?  Are there penalty fees on top of the APR?  Is there an additional card fee if you plan to add them?  Are there balance transfer fees?  Returned payment fees?  When are they due?  When are they applied?

The General Fine Print

Beyond these five things, read the entire paperwork closely.  Look carefully for any hidden gotchas: fees that kick in if you do not meet certain conditions, changes to the interest rate that can be applied, limits on bonuses like rewards programs, or conditions under which a low introductory APR can be revoked. 

In short, know what you're getting into before you sign up: a credit card is a contract, and you need to know what you're committing to legally before you sign on the dotted line.