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Credit Card Blog - Choosing the Right Credit Card

 Wednesday, 06 September 2006

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.


Wednesday, 06 September 2006 17:37:01 (GMT Daylight Time, UTC+01:00)  #     
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