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Credit Card Guide: How to Select A Credit Card
Credit cards are an integral part of our personal finance system. They provide a secure and convenient method of payment while extending cardholders a line of credit that they use to make purchases beyond their currently available funds. Yet with dozens of banks and credit unions offering hundreds of different credit cards, it can be very difficult to decide which one to apply for.
Choosing rewards versus low interest rates
Credit card users in the United States can be divided into two groups of roughly equal size, and the group you fall into should dictate the type of credit card that you use. About half of all credit card users will regularly incur interest charges by carrying a balance on one or more of their cards. If this describes you, then you should focus on finding a card with the lowest possible interest rates and fees.
The other half of credit card users will avoid interest charges by paying their entire statement balance in full, each month. For these cardholders, the best option is to ignore a credit card’s interest rate and focus on earning the most valuable rewards possible in the form of points, miles, or cash back.
Key features for a low interest rate credit card
As unsecured debt, credit card interest charges can be very expensive. Therefore, it’s imperative that credit card users minimize their interest payments to the greatest extent possible. When evaluating a credit card’s interest rate, applicants should immediately look at the terms and conditions, which, by law, all card issuers must display in a standardized format. The interest rate will be displayed as an Annual Percentage Rate (APR), which describes the percentage of interest that you would pay over the course of a year. So if your credit card advertises and APR of 15%, that number is divided by 365 and applied to your daily balance. So in this case, that works out to .041% each day.
For example: If you had a balance of $1,000 that would equal about 41 cents per day and add up to $12.50 in charges per month and $150 per year. This does not take into account the effect of compounding, which is when interest charges from the previous are added to your balance, either daily or monthly.
While some credit cards will display one standard interest rate, most will have multiple rates or a range of rates. In this case, the rate you receive will correspond with your creditworthiness at the time of the application, and you will not be informed of the rate you receive until your account is open.
Another important feature to look for is a promotional financing offer. Many credit cards offer 0% APR introductory financing on new purchases, balance transfers, or both. These introductory offers can last for as little as six months to as long as 21 months before the standard interest rate goes into effect. When an interest free promotional financing offer is applied to new purchases, interest does not accrue during this period, but the standard interest rate applies when the promotional rate expires. Nevertheless, cardholders must still make a minimum payment each month.
In the case of promotional financing on balance transfers, cardholders can pay off the balance on an existing account using their new account. Once again, the cardholder avoids interest charges during the promotional financing period, but must still make a minimum payment on the principle each month. In addition, nearly all 0% APR balance transfer offers will require the payment of a 3% balance transfer fee.
Promotional financing offers can be very beneficial if used to save on interest charges while paying down debt, but can be detrimental when cardholders use them as a way of postponing debt repayment.
Key features to look for in a rewards credit card
If you are in the market for a rewards credit card, the key is to find a card that will offer you the most valuable rewards, tailored to the kind of spending that you expect to do. When it comes to cash back reward credit cards, one strategy is to use a single card that offers a high rate of return for most purchases, with the most competitive cards offering 1.5 to 2% cash back. Another strategy is to use one or more cards that offer bonus levels of rewards at specific categories of retailers where you frequently shop, such as gas stations, grocery stores, or department stores.
When selecting a card that earns points and miles, the most important consideration is choosing one that offers rewards that are the most valuable when you redeem them. For example, frequent flier miles can be very valuable when cardholders are able to redeem them for the flights they need. But when cardholders have the expectation of redeeming miles for flights during the holidays or other peak travel periods, they will likely be disappointed by the lack of available award seats. In response to these concerns, there are now many travel rewards credit cards that offer points and miles that can be redeemed as statement credits towards travel purchases, including airfare, hotels, and car rentals.
Selecting a credit card issuer
After deciding whether to apply for a rewards or low interest credit card, your next consideration should be the credit card issuer. Most banks, credit unions, airlines, and retailers offer a credit card. You may wish to choose a card from the bank or credit union that you already hold an account with. For applicants with a limited credit history, it may easier to be approved by an institution where you already have a banking relationship. In addition, having a credit card where you also have your checking or savings account will reduce the number of logins you need to remember, and make payment a simple matter of transferring funds between accounts. On the other hand, more experienced credit card users may wish to shop across many credit card issuers in order to find the most competitive products for their needs.
Another factor to consider is the annual fee. Many reward credit cards charge an annual fee, while others do not. Cardholders need to weigh the cost of the annual fee against the value of any rewards and benefits offered.
Finally, there are different types of credit cards that appeal to specific needs. For example, student credit cards are offered to adults who are enrolled in school that have limited credit histories, and business cards are offered to small business owners to separate their company expenses from their personal ones. Another specialized type of card is the secured card. These are cards that are marketed to people with poor credit, and require the payment of a refundable security deposit. Finally, a charge card is a type of credit card that requires full payment of the statement balance each month.
How your credit score impacts your ability to get a card
Another consideration when selecting a credit card offer is choosing one that meets your credit profile. Card applicants with a limited credit history will need to start with the most basic credit cards that do not offer rewards and have limited benefits. In addition, applicants with a poor credit history and a very low credit score (below 640) will likely have to apply for a secured credit card. These are cards that require payment of a refundable security deposit, but otherwise work similarly to other cards. As you move up the credit score scale, you have greater access to better rewards and benefits.