The sheer
number of credit cards available can be bewildering if you are in the market
for a new credit card. There are cards
with low APR, cards with low intro APR, cards with airline miles, cards with
rewards at your favorite store, cards that support your favorite team, cards
that support your favorite charity, cards with cash back and all sorts of other
cards. How do you choose the right one? It all boils down to not paying more than
necessary. Fortunately, there are a few
key features to look for to help you determine whether you are paying more than
you need to be.
The most important feature to
consider is the APR or annual percentage rate.
You want the APR to be as low as possible. This is the single biggest factor in
determining the cost of carrying a balance on you credit card. One or two percent may not sound like much,
but it can mean paying hundreds or thousands of dollars in extra finance charges
while you have a balance.
The second most important feature to
consider is the annual fee. There is no
reason to pay an annual fee. The credit
card industry is so competitive that you should be able to find a card with
identical features that does not have an annual fee. If the card with the annual fee provides some
extra services like getting you concert tickets to sold-out shows or some other
sort of concierge services, it might be worth it to you to get the card that
charges an annual fee. However, it only
makes sense if you are going to take advantage of those services. If you are not going to use services that
will cost you money, there is no reason to pay for them.Now that we have covered the two
biggest concerns, we come to one of the most popular categories of credit
cards: rewards cards. Like non-rewards
cards, you should first consider the APR and annual fee. Some rewards cards charge a higher interest
rate than regular cards. There is no
reason to apply for a card that does so.
There is usually a nearly identical card that has the same reward, but a
lower interest rate. Get that card instead.
However, suppose that you cannot find a card that does not charge a
higher rate, what do you do then? You
could do some math to figure out whether the value of the rewards offsets the
higher interest rate. It almost always
will not. You would be better off
getting a regular card with a lower rate and then using the money you save
towards whatever reward you would have gotten with the rewards card. If you can find a card that offers a reward
that you would use and has a competitive rate, by all means get that card. You should also make sure that the reward
fits your lifestyle. If you never travel
anywhere or have a severe fear of flying, a card that gives you airline miles
probably is not the best choice.Some credit card issuers offer cards
that support your favorite team or school.
Many of these cards just have some sort of logo on the card and do not
cost any extra money. Treat these cards
like any regular card. Go for a low APR
and no annual fee. For example, my card
has the logo for the local baseball team on it.
It happened to be the default design offered and did not cost any extra
money, so I went for it. It happens to
be a professional team, so if it had cost any extra, I would have refused and
opted for a no-cost design. However,
some cards are for college teams and a portion of your charges goes to benefit
the school or team. If you are planning
on donating money to the school or team anyway, this is an easy way to do so,
but only do it if it does not cost you any extra. Otherwise, just send the school a check every
year.
Similarly, there are cards that
support your favorite major charity like the World Wildlife Fund or the Red
Cross. Treat these the same way as the
team and school cards. If the card is
competitive even in the absence of the donation and you were planning on
donating anyway, go ahead and get the charity card. However, if the card has a higher APR or
charges an annual fee, get a normal credit card and then donate the money you
save to the charity.
You may be wondering why I am
recommending against the charity cards if they cost you more than a regular
card. You might be thinking the extra
cost is simply the price for donating to the charity. Depending on the card, you may or may not be
right, but even if that is indeed the case, I would still recommend getting the
cheaper normal card. The reason I
recommend getting the cheaper card is in case your financial situation takes a
turn for the worse like if you lose your job or in case of severe illness. In those sorts of situations will usually
have to cut back on expenses like giving to charity. If you just send in checks periodically, it
is easy to cut back – just reduce the amount you send or stop altogether. If you donate in form of a higher interest
rate on your card, you lose that flexibility.
However, if you can find a charity card that does not carry a higher
APR, by all means, go for it. A final thought on donating to charity is the tax
deduction that often follows. If you
donate money to charity, you can deduct it from your income reported to taxes,
but if you give to charity through a credit card, they get to make the donation
and also claim the tax deduction.
If you have a lot of debt on high
interest cards, you might be looking for a card that offers low APR on balance
transfers. Some even offer zero percent
for six months to a year. You should still
treat these like a regular card – get a low regular APR and no annual fee. If your debt is small enough that you can pay
it off during the six to twelve month period and you will not be making any new
charges, it still makes sense to get a card that offers a low APR on balance
transfers even if the regular APR is a bit high. You should be aware that many credit card
issuers will apply any payments towards the balance with the lowest APR
first. So if you have a $2000 balance
transfer at zero percent and then you charge another $1000 of purchases at the
regular APR, any payments you send in will go towards the $2000 until that
balance is paid off. In the meantime,
the $1000 of purchases will be accruing interest at the regular APR. Your issuer may also retroactively apply any
interest on the balance transfer once the six months or a year is up. That is why it is important to get a low APR
and to pay down your balance transfer as quickly as possible and keep new
charges to a minimum until it is paid off.
These policies can vary from issuer to issuer so you will want to ask
your issuer.
It may seem like there is a lot to
consider when picking a new credit card and there can be. However, as long as you keep in mind that
your goal is to pay as little as possible for the use of your card, the picture
becomes much clearer. Find a card with a
low APR and no annual fee and you will do fine.
As with all matters involving a contract, you should read it thoroughly,
and ask questions about any parts you do not understand.
Team Yourcreditnetwork.com