Best Practices, How do I Choose a Credit Card?

When you are shopping for a credit card, what are you looking for?  Are you considering the annual fee, interest rate, penalties, late fees, credit limit, and rewards programs?  If not, then you should be.  Is the best card a card with a low interest rate?  Not necessarily.  Remember, the rate only matters if you revolve a balance.  If you never revolve then the rate becomes irrelevant.

Here are things to consider when you’re shopping around for a new credit card…Annual fee – This is the fee paid every year for the privilege of having the card. The most attractive cards are those that don’t charge an annual fees.  But, just because there’s no annual fee today doesn’t mean there won’t be one tomorrow.

Interest rate – You want the card that offers the lowest Annual Percentage Rate (APR). The rate can be a flat rate or tied into the prime rate (aka a variable rate card). The interest rate charged is very important, especially if you revolve or don’t pay your bills in full each month. There may be different rates for balance transfers and cash advances.  Again, your low rate today could be changed to a higher rate tomorrow.

Incentives – Card issuers offer incentives to encourage you to switch to their card such as balance transfers from another card at an introductory rate. This interest rate may change after 12 months, so be careful.

Late Fees – Late fees are charged when a payment is not received by the date listed on the bill. This common fee is $35, which is added to your bill the next month.  Some issuers are flexible about waiving those fees if you’re not late often.

Penalties – There may be a penalty fee or penalty APR for late payments. Your interest could increase or even double as a result of late payments. Other penalties are fees for returned payments.  Ask about their “default rate.”

Credit limit or credit line – The most you can charge on the card is the credit limit or credit line. You want a card with a high credit limit, but don’t charge the maximum or even come close. You should be responsible with the credit limit.  Having a low balance compared to the limit is good for your credit scores.

Rewards programs – There are many programs that offer rebates, cash back on purchases, points that can be redeemed for gifts and travel.  These promote card usage and loyalty.  If the rewards card has the same benefits as others, this card can be beneficial to you.  Beware though that the rates on these cards are generally higher than non-rewards cards.  And, many of these cards have annual fees.

Other benefits – Some of the other benefits offered are insurance on rental cars, concierge services, travel insurance and extended warranties.  You need to beware of the restrictions on these.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Credit Report, Credit Score, Getting Credit, Money & Identity

This post was written by John Ulzheimer