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September 2006 |
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Finding the Right Credit CardThey've Got a Deal for You — Whoever You Are If you're reading a publication called Debt Matters, there's a good chance you've had a bad experience with credit cards. But the hard truth is that almost all of us need a credit card. We need it to establish or re-establish a solid credit rating. And credit cards are critical to functioning in the information age. So, seeing as you've got to have one, what kind of card should you shop for? The answer depends on which type of cardholder you are. Here, we run through all types: THE STAY PUT CROWD: If you're happy with your current card, stay with it. Generally speaking, the longer you're with a card the better, because it gives you a longer credit history which benefits your FICO score. Also, if you are having trouble managing your credit, perhaps another credit card is simply a bad idea. THE MONEY MINDED: The financially prudent — the folks who never carry a balance on a card and are never late with a payment — really don't have to shop around for interest rates or low penalties. These folks never get charged late fees or interest, so the rates can be sky high as far as they're concerned. Money-minded individuals foremost want a card with no annual fee (unless they are a reward seeker, but more on that later). Plenty of cards offer no annual fees. Second, this crowd wants good service. Does the card provide free travel insurance? Does the card allow me to set my bill's due date? Is it accepted everywhere? Does the card provide a decent grace period between when a charge is made and the next bill comes due? Can I get my statements online? Any combination of these is important to the money-minded set. And third, they are interested in at least one type of reward: cash back. A few credit cards reward their customers' loyalty by giving back small percentages of what they spend using their card. THE REWARD SEEKER: Reward seekers can be just as shrewd as the money minded. The reward seeker is usually after one thing, points or frequent flier miles. The points can be exchanged for prizes, free gas or even a car. The frequent flier miles are so popular that most are willing to pay an annual fee to earn miles for their dollars spent. Some reward seekers no doubt carry a balance. That is a mistake. They should go for a low-interest card with no annual fee. For those who don't carry a balance, the calculation should be fairly simple: Is your likely reward more valuable than cash back? Figure out how much you typically spend on your credit card, then, based on the total spent, calculate what the best cash back program would pay you back in a year. How does that amount compare to the cost of, say, a free flight minus the annual fee. Also, keep in mind, if it's going to take you three years to earn a free flight that means you'll pay three annual fees to get there. There are other factors to consider. How likely are you going to use the reward? Is $100 cash back worth more than a $300 flight that you wouldn't take unless it were free? THE REVOLVER: The revolver is to financial health as the smoker is to physical fitness. They never pay off their balance, always keeping a few thousand dollars of revolving debt on their credit card. Paying a finance charge is expected every month, like paying a utility bill. They've been paying interest on things they don't even own anymore. They don't enjoy a grace period and, thus, start paying interest on things the day after they buy them. Forget rewards. Forget cards with annual fees. (Who wants to pay interest on an annual fee?) Revolvers need to go for the lowest APR (annual percentage rate) possible. Federal law requires all credit card interest rates to be calculated the same. That way you can compare APRs with confidence. For the revolver the APR is the most important consideration. Financial websites such as www.bankrate.com can help locate cheap credit cards around the country. Another factor for the revolver to keep in mind is the variable rate information. How much can the rate go up because you were late with a payment and so on? And beware of teaser rates. They might be low at first, but unless you whack your balance during the introductory period, you could get whacked with high interest a few months later. |
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