Despite the current economic climate and the ongoing credit crunch, there are still plenty of credit cards out there to apply for. Let’s talk about the best way to choose your next credit card.

Interest Rates

Certain perks, such as airline miles or cash-back rewards, are nice, but the interest rate you’ll be charged is perhaps the most important feature of any credit card. Even seemingly small differences in interest rates can make a big impact on the amount you’ll pay in interest as long as you carry a balance.

Let’s look at an example

Say you have a credit card with a $2,000 balance and an interest rate of 14%. If you make only the minimum monthly payments, it will take you 173 months to pay off your balance and you’ll pay a total of $1,833.24 in interest.

Compare that to a card with the same balance and an interest rate of 20%. In this case, if you pay only the minimum each month, you’ll wind up paying a total of $2,723.59 in interest over the 186 months it will take you to eliminate your debt, a difference of $890.35 for just a few percentage points.

As you can see, it’s definitely worth it to spend some time shopping around to find the credit card offers with the lowest interest rates possible.

Bonuses and perks

While the bonuses and perks offered by different credit card companies shouldn’t be as big of a concern as the interest rate you’ll be charged, they’re still something that you’ll want to take into account. Given the huge variety of rewards programs today, it shouldn’t be hard to find one that suits your needs. If you’re a big-time traveler, a card that offers travel points towards airline tickets or hotel stays may be a good choice. Or, if you make frequent credit card purchases, look for a card that offers cash back on every item you buy.

Alternatively, if you can’t decide on a single rewards program, look for a card that offers a general rewards program or one that earns you bonuses at a certain number of locations you frequent. For example, some cards exist that allow you to select a limited number of purchase locations – like a certain line of grocery stores or gas stations – and earn extra bonuses on items bought there. Over the life of the account, these bonuses and perks can add up, so they’re certainly not something to scoff at.

Rates and fees

Besides the interest rate you’ll be charged on the balances you carry, credit cards may institute a number of other fees or charges that will cut into your spending power. Obviously, it’s in your best interest to avoid as many of these as possible. A few of the things you should check the fine print for include annual fees to keep the card open, rate hikes that occur if you’re late with a payment by as little as one day and the credit card company’s policy on fraudulent transactions. Being an informed consumer from the start will help to prevent any surprises from catching you off-guard later on.

The Obama administration is working hard to reform laws for companies who issue credit cards. On May 22, the president signed off on the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, act of 2009.

The bill is set to improve the way companies deal with consumers and act as a watchdog agency that protects users. Here are some of the benefits of the new law.

Increases are retroactive

Card companies can no longer raise rates on an existing balance unless the customer is 60 or more days past due. There will no longer be “anytime, any reason” clauses that almost every credit company employed in former contracts.

If the cardholder does trigger the default rate, the bank has to be willing to restore the rate if the cardholder maintains six consecutive on-time payments. Rates also can’t be raised the first year after the card is issued and low introductory rates have to last at least six months.

Rate hikes

Lending companies are still able to raise credit card rates, but they have to give consumers 45 days notice before the new rate is effective. This can help consumers to budget more wisely and switch to new credit cards if needed. Currently, notification time is only 15 days.

Gail Scherwood, a consumer in Billings, Montana stated, “The notice we received was dated two weeks prior, but we didn’t get it until four days before the increase. That didn’t seem fair.” This new rule hopes to resolve this issue, and give customers time to react to pending increases.

Fees

Fees are another hot topic with credit cards. Cardholders no longer will face over-limit fees “unless they elect to allow the creditor to approve over limit transactions.” Also, in general banks won’t be able to charge fees to consumers who pay their bills over the phone or online.

The only fee they will be able to tack on is an expediting fee at the consumer’s request. In addition, if cardholders pay at a bank’s branch, the payment must be posted same-day to avoid late fees.

Student credit cards

There are restrictions on students ages 18 to 21. This consumer group has to have:

1. An adequate income or a co-signer
2. Attended a financial literacy course

If they don’t have both, they won’t be approved for a credit card. This law protects young people who, in the past, were heavy targets for the credit card industry. As a result, many young people were overwhelmed with debt because of the “free” credit cards they were being inundated with. A recent survey showed that the average college student is holding $3,173 in credit card debt. This is a record high since 1998 when the first study was done.

Double-cycle billing is over

Another result of the new credit CARD law is a ban on double-cycle billing. This is when credit card companies base their finance charge on the current and previous balances. This allowed companies to charge interest on debt already paid from the previous month.

Payment allocations

Previously, payments were applied to lower-rate balances first, thus bringing in fees and interest rates on higher balances. Credit card companies are no longer able to do this. The new law requires that any “above minimum payment is applied first to the credit card balance with the highest interest rate.” This could save thousands for consumers.

More time

Finally, consumers will have more time to pay. Card companies must send out statements to consumers 21 days prior to payment due dates. This will give people adequate time to make their payments and adjust their budgets.

Credit CARD

The new law for credit cards should be enacted shortly. It will do a lot to monitor companies’ actions and protect card users. President Obama’s goal was to set in motion a safeguard for credit users, and this law is the first step to reaching that goal.

Related Video:

Credit card lenders take a gamble with bankruptcy (photo by Freerangestock.com)

Although many interest rates were recently cut, credit cards lenders are set to increase theirs. Mortgages and savings rates have fallen dramatically due to government intervention; however, credit card rates have moved up. Even cards listed as “low-rate” are averaging 11.62%, balance-transfer cards are averaging 13.15% and cards with cash returns are at 13.82%.

Good customers are not exempt

These rate increases are happening with all cards and affecting even the best-paying customers. Twenty-year customer Echo Garret of Marietta, Georgia says, “I certainly don’t feel like a valued customer.” The interest rate on her Citi Advantage card was recently raised to 19.99% from its 20-year average of 10.9%. Her husband’s card had an equally painful increase in the form of a tripled interest rate. “We’ve been good, longtime customers and there was never a problem with our accounts. We pay on time and more than our minimum…I just don’t understand,” she added.

Last-ditch revenues for lenders

Many credit card companies see increasing their interest rates as an easy way to bring in more revenue. It also makes them look more financially stable when revenues are up. A lot of companies are also trying to maximize their income streams before the new federal rules governing credit card interest rates go into effect. The new rules will prohibit rate hikes on existing balances unless borrowers fall 30 days behind on payments. The rules take effect in 2010 and right now credit card companies are rushing to maximize interest rates before the deadline.

A game of Russian roulette

Many experts say that these last-minute interest rate increases are potentially detrimental to lenders. They might help the companies in the short term, but in the long term it’s a “game of Russian roulette,” says Jose Garcia, senior researcher of Demos. “They’re playing the [balancing] game of getting people to pay the most they can in interest without going into default—where the issuer gets nothing,” he adds.

Last-resort bankruptcies for borrowers

Robert Manning, research professor of Consumer Financial Services, believes that higher rates force even good customers into default. He believes that credit cards with sudden interest-rate hikes cause minimum monthly payments to reach unmanageable levels. This pushes customers into default and leads to bankruptcy filings.

Neither a borrower nor a lender be

One customer who fell into this trap is Amanda Burnett, recent college graduate. She intended to pay off her $3,500 Bank of American credit card but when the bank raised her APR from 16.99% to 25.99% she was unable to meet even the minimum required monthly payment. She called to close the account and then asked for a better rate. The bank told her that once an account is closed, its terms are fixed. Said Burnette, “I was shocked [because] I had planned on paying off my balance and keeping the credit card for future use, but now I feel misled and betrayed.”

Bank of American spokesperson Betty Riess explains that it is their policy to allow borrowers to opt out if interest rates are too high; however if a borrower doesn’t opt out and instead closes the account, the higher interest rate remains.

Credit cards after 2010

Hopefully, once the credit card reform bill becomes effective in 2010, interest rates will become more manageable. Riess states, “We are hoping that credit cards will work within our customers’ budgets, while still bringing us the revenues we need to offer outstanding lending services.” Only time will tell if credit card companies are able to strike this balance.