Welcome to the second part of a three-part series on credit cards. If you missed last week’s post, I took a look at the reasons why you might get a credit card. This week, we’ll take a look at what factors you should consider when you’re looking for a credit card.
The most important factors vary depending on what you plan to use the card for:
· Planning to pay off your bill in full every month? In this case, the interest rate doesn’t really matter as much. Look for a card with the best perks for your lifestyle that has a longer grace period to pay your bill and a minimal annual fee.
· Looking to buy on credit and carry a balance? Look into a card with the lowest possible interest rate – even if that means you have to forgo some perks. If you can find a card with a 0% or really low introductory rate to help you get your balance paid off faster – even better.
· Looking for a go-to-card for most of what you buy? You want a card with perks that fit your lifestyle and a generous credit limit.
· Want a card just for special circumstances like emergencies or travel? Go for a card that fits that circumstance. In the case of travel, great travel perks and no foreign transaction fees. In the case of emergencies, a no-frills card with a low interest rate and low fees. If you plan to use your card only occasionally, make sure that you charge something to the card every few months and pay it off right away so you keep your card open.
Once you know how you’re going to use your card. Here are a few other things to keep in mind as you compare cards:
· Interest Rate: One of the most important things to look at when you’re comparing cards is the APR (Annual Percentage Rate – in other words the interest rate). Is it fixed or variable? Many cards offer introductory interest rates, take a look at that rate and how long it lasts. How much might the rate increase after the introductory offer ends? In some cases, if you’re still carrying a balance after the introductory period ends, the credit card company will charge you retroactively for the new interest rate on the entire balance.
· Fees: There are a variety of fees that you could be charged. Take a look at the annual fee – if there is one. Is the fee worth it for the rewards provided? If you’re transferring a balance from another card is there a balance transfer fee (typically 3-4%)? Make sure the transfer fee is less than the interest you would pay on your current card. Or, see if you qualify for cards with no balance transfer fee. Some other fees to investigate are foreign transaction fees, late payment fees, and over-the-limit fees. Credit card companies can be fairly opaque about their fees. Be sure to do the research before you sign on.
· Perks: Some cards offer loyalty points or rewards. Others offer you cash back. Make sure that you read the fine print on how to qualify for these perks and where they can be used. Ask yourself – is the perk something I would really use? Does the cash back really outweigh potential costs in interest? If an introductory perk is offered (i.e. – 30,000 bonus miles for spending $3,000 in your first three months), will you be able to spend that much money in that time period and pay it off?
· Acceptance: Some credit cards are accepted more places than others. This seems to be becoming less and less of an issue. Both Visa and Mastercard are very popular in the United States. American Express is also relatively popular – although not accepted everywhere. Make sure that your card is accepted at the places where you’d like to use it. If you’re hoping to use it abroad, make sure it’s accepted in the countries you plan to travel to.
· Credit Limit: How much will the credit card issuer let you borrow? Just because your limit is $10,000 doesn’t mean that you should max out your card – in fact, that can hurt your credit score. It’s helpful to keep your credit utilization (what you use vs. how much you’re allowed) at 30%. So you’ll only want to use up to $3,000 on your credit card with a limit of $10,000.
If you’re planning to carry a balance, you might also look at how your balance will be calculated. Most use the average daily balance, but others use two billing cycles – stay away from those. You might also consider customer service both online and via phone which will be helpful if you ever have an issue with your card.