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Financial First Steps: The ABC’s of Credit Cards

shutterstock_221636809If you are now in a position to look into getting a credit card, knowing how to choose the right card is important. First, you must recognize the type of credit card user you are. There are three types of credit card users: Revolvers, convenience users, and combination users.

A revolver generally only makes a small payment at the end of each month, so a low annual percentage rate (APR) is the most important factor. The convenience user pays in full every billing cycle, so the most important factor is getting a card with low or no annual fee and a longer grace period. The combination user tends to do a little of both what the revolver and convenience users do. For combination users, a low annual fee and a low APR are equally important.

Recognize how you use credit cards, and choose the best card accordingly. It is important to comparison shop- and be thorough. You don’t want to choose the first good deal you see, as there might be even better options available to you. Just be cautious with your card. It can be extremely easy to fall deeper and deeper into debt if you only pay the minimum amount each month. Credit cards are a costly way of borrowing, so be wise with how you use your card and have a solid budgeting and payment strategy.

Here is an example. You are deciding between three cards: Cards A, B, and C

Card A Card B Card C
APR 12% 13% 14%
Annual Fee $39 None None
Grace Period 25 Days 21 days 25 Days

So which card do you choose? Well, if you always pay in full at the end of the month, and don’t anticipate carrying a lot of debt on your card, you are a convenience user. Therefore, you should pick Card C because there is no annual fee and there is a generous grace period (just in case extenuating circumstances or simple forgetfulness causes you to need a few extra days to pay). However, if you only make small payment and tend to run up your credit, you are a revolver and should choose Card A because it has the lowest APR. If your card use tends to vary, you are a combination user, so all of the factors are important and you should choose card B because it is the best balance for all three categories. However, please note that these are extremely basic examples only intended to introduce you to the credit card-choosing-decision process.

For more information on setting financial goals, as well as a variety of other topics, check out AIER’s Start Here digest. Dedicated to helping young people set their “life strategy,” the Start Here digest is a great resource for high school and college students interested in getting their financial lives on track. Best of all, it’s free!

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