6 things to consider before choosing a credit card
By Pat Curry
A credit card is a bit like a chain saw -- it's a very handy tool, but it's capable of inflicting horrendous damage if used improperly. The same advice applies to both of them -- choose the right tool for the job, and follow the safety rules.
Here are six things to consider before you select a credit card:
1. Spending habits
The first question to be answered is how you intend to use the card. Are you the kind of person who will pay off the card every month without fail, or do you anticipate carrying a balance from month to month? Are you going to use it to pay for everything, or just for emergencies?
- If you're going to pay the bill in full every month, then the interest rate doesn't really matter to you. Look for a card with no annual fee and a longer grace period so you don't get hit with a finance charge.
- If you're going to carry a balance, you want the lowest possible interest rate and a low introductory rate.
- If this is going to be your go-to-card for most of what you buy, look for a card with a generous credit limit and a solid rewards program.
- If it's only going to be used for emergencies, go for a no-frills card with a low interest rate and low fees.
"There are so many cards that are out there," says Howard Dvorkin, founder of Fort Lauderdale, Fla.-based Consolidated Credit Counseling Services and author of "Credit Hell: How to Get Out of Debt." "People have to sit down and think about what's important to them."
2. The interest rate
On a credit card offer, the interest rate appears as the APR, or annual percentage rate. It can either be a fixed rate or a variable rate that is tied to another financial indicator, most commonly the prime rate. With a fixed-rate card, you know what the interest rate will be from month to month; a card with a variable rate can fluctuate. However, even a card with a fixed interest rate can change based on certain triggers, such as paying your card -- or any card -- late, or going over your limit. Or because the credit card issuer decides to change it. Yes, they really can do that; they just have to notify you.
3. Credit limit
This is the amount of money that the credit card issuer is willing to let you borrow. Depending on your credit history, it could be anything from a few hundred dollars to tens of thousands of dollars. You don't want a situation in which you're close to maxing out your credit limit. It can hurt your credit score -- and some credit card issuers have cut customers' credit limits to an amount that's lower than their current balance. Adding insult to injury, there's a penalty when that happens.
4. Fees and penalties
There's no shortage of ways for a credit card issuer to make money off you. Common charges include fees for transactions, such as balance transfers and cash advances, or for asking to increase your credit limit or make a payment by phone. There also are penalty charges for paying your bill late or going over your credit limit (they don't decline your card; they just sock you with a fee for it).
Look for cards with reasonable fees. On balance transfers, for instance, look for offers with no transaction fees and zero percent interest for at least 12 months. And don't pay extra for rewards programs. There are plenty of card issuers who don't charge extra for them.
"This is a crucial issue," says Eric Tyson, author of "Personal Finance for Dummies." "You might not intend to carry a balance. But before you agree to accept a card, understand all the terms and conditions because your situation might change ... Stay away from ones with exorbitant fees and high late fees, even if the other features seem relatively attractive."
5. Balance computation method
If you're going to carry a balance, you need to consider how the finance charge is calculated. The most common method is average daily balance, which means that the daily balances are added together and then divided by the number of days in the billing cycle. Stay away from credit cards that compute the balance using two billing cycles; this winds up costing you more money in financing fees. There are plenty of cards that don't use it.
Many card issuers offer reward programs to their customers to induce them to use the card. Assuming you're going to make the purchases anyway -- and the card issuer doesn't charge extra for the rewards program -- it can be a nice benefit. Look for a program that offers flexibility, such as cash or travel, and rewards you'll actually use, that are easily earned and redeemed, says Diana Don, director of financial education for card issuer Capital One. "Be mindful of various restrictions that come with some programs," she says. "Take note of whether rewards expire and if there are limits regarding how many points you can earn."
CREDIT CARD HELP: The basic fundamentals of credit cards