Now that the economy is starting to rebound, albeit the recovery is slower than everyone would like, credit card companies such as MasterCard, Visa, and American Express are starting to stimulate new card members.
Financial studies from both Harvard and Stanford University show that credit card spending has increased in the last year due to the economic upturn.
Now that credit cards are being used more again, chances are good that you are seeing more offers for credit cards in the mail again. But not all cards are equal.
It’s best that you take time to review your options and to choose wisely in order to choose the card that’s best for you. Here are ten things that we suggest looking into prior to deciding on that new credit card.
1. Stay with the established companies
Many people are surprised to find out that credit card applications can also be subcontracted out.
While still with the credit card company, these are the applications that come in unmarked, plain envelopes rather than ones bearing the bank or credit union’s logo. Another clue to look for is the return address; if it is an independent marketer there usually is a non-descriptive address such as “Credit Processing Department” or “Credit Administrator.” Generally speaking, these cards are not your optimum choice. Most have a fee to apply, and the fees do not stop there! We recommend that you stay with a credit card that comes directly from the institution.
2. Pick Rewards that you will use
Most, if not all, credit card companies will encourage you to join with promises of fantastic rewards. While we feel it is better to get rewards than none, pick the point rewards system that fits your lifestyle the best and you will use. For example, why would someone afraid to fly pick an airmiles card, or the perpetual globe-trotting traveler choose a cash-back card?
Likewise, before signing up, look into the details and fine print of the terms of the reward system. For example, mile programs are great, but pay attention to which airlines you can redeem the points on. If there are certain routes and places you know you fly to more often, let’s say to visit family members, then look into which airlines have the best routes to that city and then find a credit that offers miles with that airline. Cash-back cards are also great, but know that it often is for only a portion of the items purchases. The credit card companies can provide you with a list of these items. Read through it first, and decide if these are items or services that you actually purchase, in order to take full advantage of the cash back reward.
3. Annual Fee – what to watch out for
Look into if the card has an annual fee, or not. Once in a while credit card companies come across as having no annual fee for by reading the fine print, there is an annual fee but is waived for the first year. There is a difference.
Just because there is a yearly fee, don’t discount the card right away! Annual fees are also not all bad. The important question to ask yourself is will this be your primary credit card or one that you use frequently, or are you just signing up for the benefits? (see above) If the card benefits are ones that you will use, and take advantage of enough so that they offset the annual fee, then great! But take the time to crunch those numbers, before signing up for a card you will not use frequently enough to counterbalance the yearly fee.
4. Interest is compounded how often?
When carrying a balance, credit card companies compound interest. What this means is interest is added to your balance; essentially paying interest on your interest.
While we recommend in most cases to pay your balance off at the end of the month, sometimes there are reasons to carry a balance. Most credit card companies compound this interest daily, which results at the end of the day your balance is higher than the start. Because the credit card company can re-calculate their interest approximately 30-times a month, the bill can be somewhat larger by month’s end, as opposed to a bi-weekly or monthly compounding of interest.
There are a few credit card plans that compound interest less frequently than daily. If you plan on not paying your card off at the end of the month and carrying a balance, then this is something you should look into. If you plan on carrying a balance, keep reading as there is another important point for you later in this article.
5. Introductory Periods
Another tactic credit card companies use to entice new members is an introductory interest rate. For example, many cards offer a 0% interest rate for a period of time. This can be an advantage when purchasing big-ticket items, especially if taking advantage of reward points, but it is critical you know when the introductory period ends. These can vary as much as 3 months to, in rare cases, 36 months.
It is also important to understand the terms of the promotion. Is this all purchases or just balance transfers? Sometimes certain features have a 3 month period while other components of the introductory promotion remain for 18 months.
It is also important to understand the penalties and if they can affect introductory promotions. For example, does being late on a payment negate introductory rates going forward? Usually they do not, but it is best to know in advance.
What we recommend considering the introductory period as icing on the cake. Unless there is a promotion that is too good to pass up, consider the card on its merits after the introductory period is over. After all, why would you eat a cake if only the icing tasted good?
Here is a good 18 month 0% balance transfer option with no annual fee:
6. Balance Transfer Fees (and what to look for)
Most credit cards offer balance transfer options. Before you transfer a balance, look into the actual details, particularly if you are trying to reduce your debt owing quicker.
You can use a balance transfer pay down your principal rather than the interest owing, but be aware that there often is a balance transfer fee. So even though you might not pay any interest on the transferred balance for 6 months or a year, you might have to pay a flat fee to transfer the balance in. What we recommend is, if there is a balance transfer fee, to calculate the transfer fee versus the interest paid over the period of time and choose the most economical option. What also suggest looking for a card that does not have a balance transfer fee to begin with.
7. Consider the APR (Annual Percentage Rate)
Another important thing to contemplate is the APR. Know that there often is a different APR for purchases as there is for cash-advances. Ask yourself if you plan on using cash-advances or not.
It is also important to take note of the default rate. What the default rate is the amount you are charged with a late payment or if you go over your credit limit. Usually the default rate is higher, or at the very least, the same than the cash-advance rate which is typically more than the purchase rate APR. Sound confusing? What we recommend is this: all things being equal, select a credit card with the lowest interest rate. Out of the three, the purchase rate (or Purchase APR) is typically the most important, as you will be purchasing with the card more often than cash-advances, however be cognisant of the other two APR’s, provided you use your credit card to get cash (not something that we recommend unless absolutely necessary).
8. Minimum Charges
A minimum financing charge is the minimum dollar amount you are required to pay each month, no matter how big or small your balance is. This typically only matters if you plan on carrying a small balance. For example, let’s say your balance is $20, yet your monthly minimum financing charge is $50. In this case, it would not make sense to carry a balance.
What we suggest is review the credit card terms to know if your new credit card comes with a minimum financing charge. What we recommend is if you are using a credit card that has a minimum financing charge, then to be aware of the amounts and whenever possible, pay off the entire balance at the end of the month.
9. How is the Balance Calculated (continued from #4)
In addition to how the interest is compounded, the way the balance is calculated is also important and ultimately affects the bottom line of how much (or how little) interest to pay. For those that pay off their credit card balance every month this is a moot point, but if you do choose to carry a balance know that there are two methods credit card companies calculate:
We recommend an adjusted balance, and the way it works is the credit card company will take the balance on the last day of the billing cycle period, then subtract any payments made during the same cycle. This works to your advantage, as you can pay part of the balance without interest calculated for that billing cycle.
Daily Average Balance
This is also known as “Average Daily Balance” by some card companies, so know that it is the same thing. Essentially your credit card balance is re-calculated every day. At the end of the cycle, it is averaged and interest is charged off your average balance. This is less advantageous of the two options.
10. The Fine Print (terms, conditions, and additional fees)
The fine-print! Make sure you ask about other conditions or fees. By law, credit card companies are required to post the complete terms and conditions. This is usually available online, or you can also call the customer service number and ask them to fax or mail you this information.
A very important thing to look for is how the credit card resolves its disputes. Find out if you are subject to binding arbitration, which means instead of resolution in court that the decision is made by an independent third-party. Sometimes there can be fees involved with this as well. Even if you are not anticipating any disputes, it is best to ask about this in advance.
All in all, not all cards are created equal. Do your homework, and look into the details. Initial effort upfront results in a problem-free relationship with the card and avoiding any hidden surprised. Click here for a list of credit cards that we recommend.