Dear Opening Credits,
There are so many different types of cards -- Visa, MasterCard, American Express, Discover and probably lots of others that I don't even know about -- but what's the difference? Is one better than the others? I'm trying to figure out which I want to get for my first card, and I just want to have a better understanding. -- Clueless about cards
Smart questions. There is no one "best" credit card for everyone. The best card for you will depend on many factors, including how you plan to use it.
There are significant differences among credit cards. Here's what you need to understand before you start shopping:
Payment networks and issuing banks
Let's start with Visa and MasterCard. They aren't the companies that actually offer you credit cards. They don't loan you money, either. The credit card offers -- and the credit itself -- come from a bank, credit union or other financial institution, known as an issuer. Each issuer sets the specific terms of the card, such as the interest rate, meaning that you can have two Visas or two MasterCards from two different issuers with significantly different terms. The issuer is also the party that takes the hit if you fail to pay off your card.
Visa and MasterCard are called payment networks; they're basically the computer systems that allow for processing of credit card transactions As a cardholder, you won't find big differences between them. They both provide a variety of benefits. For example, they set caps on limited liability if a card is lost or stolen and the ability to charge back damaged merchandise. Many merchants accept both kinds of cards for purchases. Both say they're accepted by more than 20 million merchants in more than 150 countries.
Discover is a bit different. Its cards are not as widely accepted as those with the Visa or MasterCard logos. Also, it issues its own cards through Discover Bank, along with partnering with several other issuing banks.* The cards gained popularity by offering cardholders a cash-back bonus, calculated as a percentage of purchases.
American Express has an even more unusual story. The company built a reputation as an "exclusive" lender for select clients rather than for the everyday guy. Originally, it issued all of its own cards, charged high annual fees and only dealt in charge cards -- accounts that had to be paid off in full every month. Times have changed, however. It still runs a payment network, issues cards and generally has a reputation for being more of a high-end card than Visa, MasterCard or Discover, but it has begun partnering with other issuing banks, too. In addition, it now offers credit cards -- which allow cardholders to carry a balance -- along with charge cards.
The stuff that matters most
Now let's get down to the real meat of choosing the right card for you. Ask yourself these questions, and use your answers to narrow down the cards you should consider:
Will I carry a balance? If you plan to carry a balance, the interest rate on the card is especially important, and you'll want the lowest possible rate on your credit card. Even if you plan to pay your balance in full each month, there may be times when you can't.
What's the APR, or interest rate? Many cards draw customers in with low introductory APRs, which often skyrocket after the introductory period. You should also be aware that, these days, issuers are looking for any possible excuse to boost those rates. That means that if you miss a payment -- or are even just slightly late with a payment -- you could see your rates increase dramatically because the lenders will view you as a risk. It can even happen if you miss a payment on your mortgage or car loan. This practice of one lender raising your rates or fees for a misstep you make in dealing with a loan from a different lender is called universal default. Recent credit card reforms have banned this practice, but the rules won't take affect until the summer of 2010, so watch out.
What's the grace period? The grace period is the amount of time you have to make your payment in full without interest charges starting. The longer the grace period, the better.
Is there an annual fee? Some cards charge annual fees -- annual fees on rewards credit cards are often the highest, since you get something back in the bargain.
What are the other fees? Most cards have fees for late payments, going over your spending limit and more.
What's the spending limit? One card might give you a $500 limit and another may offer $2,000. While higher may seem to be better, you might be tempted to spend more than you can afford if you have more available credit.
Does the card offer rewards? Many rewards credit cards offer the chance to build points that can be used for airline travel. Others are co-branded with retailers and offer rewards specific to a particular store. Understand the rewards limits and exclusions before choosing a card for its rewards.
Now it's time to look more closely at a few cards that fit your requirements. CreditCards.com offers a wide variety of cards, as well as tools to help you find what you're looking for.
So, choose carefully, and then don't forget to use your first card wisely, so you can build up a positive credit history.
* - As originally published, this article stated that Discover exclusively issues their own cards. Please see CreditCards.com's corrections policy.
Karin's money makeover column "Get With The Plan" can be seen every Sunday in "The Star-Ledger" and "The Trenton Times." She also hosts and writes "Money 911," a multimedia series for MSN Money. Before writing became her main focus, Mueller was the executive producer of CNBC's The Money Club, where she led the team that won the network's first ever Cable ACE Award for Business and Consumer Programming. Mueller lives in New Jersey with her husband, three kids, one guinea pig and one leopard gecko. Whatever they don't eat goes into her retirement savings accounts. A comprehensive archive of her writings is available on her Web site, www.KarinPriceMueller.com.
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