Choosing a Credit Card

Credit cards share a number of specific characteristics that define this form of credit.

  • They’re issued by lenders, typically banks, credit unions, or other financial services companies
  • They’re widely accepted as a way to make purchases in person, by phone, or online
  • They offer access to revolving credit, which means you have continuing access to an amount of money known as your line of credit. When you use the card, you’re borrowing against that line. Any amount you repay is available for you to borrow again
  • They add a finance charge, figured as a percentage of the amount outstanding against your credit line, to what you owe if you haven’t paid the previous balance in full by the due date

credit cards

But each card also differs in certain ways from the others available to you, including whether or not they charge an annual fee, the rate at which the finance charge is figured, whether they have a grace period, and the way the finance charge is calculated. It’s important to investigate the terms of any card you’re considering since some of these differences can have a significant impact on what using credit costs you.

CARD ALTERNATIVES

You have alternatives to credit cards that may be appropriate to your borrowing needs, either in addition to a traditional credit card or in place of it.

Charge cards, which look very much like credit cards,  allow you to make purchases using the card and require you to repay your outstanding balance in full each billing period. Your credit limit is typically not explicit as it is with a credit card, but your ability to use the card may be revoked if you fall behind on your payments or your outstanding balance is too high. Most charge cards, including American Express cards and Diners Club cards,  have an annual fee.

Retail credit cards generally can be used only to make purchases from the issuing store or other retailer. These cards typically don’t have an annual fee and may offer discounts on purchases, but finance charges may be calculated at a higher rate than on other credit cards.

Affinity cards, sometimes called loyalty cards, are issued by a financial services company in conjunction with another organization, such as an airline, a car company, or a non-profit organization. Each offers a specific advantage for using the card, but you must often charge significant amounts to realize the benefit. Affinity cards usually have an annual fee.

MAKING YOUR CHOICE

When you’re choosing a credit card, the questions to ask — and answer — include:

  • Do you always pay your credit card bills in full and on time each month? If so, you want a card with a grace period during which no interest is charged on the purchases you make.
  • Do you sometimes take a number of months to pay off large purchases? If so, you want a card that calculates the finance charge at the lowest APR you can find.
  • Do you regularly pay just the minimum balance or somewhat more each month?If so, you also want a card that uses a low APR to calculate finance charges. You may also want a card with a limited credit line to restrict the amount you can borrow.

You may decide that one card will meet your needs, but it’s possible that using two would be a wiser choice. For example, if the only times you don’t pay in full are when you make a major large purchase, you might choose one card for routine purchases that you’ll pay in full and a second card to use for purchases that will take more time to pay off. That way, you incur finance charges on just a portion of what you spend.

What you want to avoid is a wallet full of cards. No only do you increase the risk that you’ll spend more than you realize, but you’ll also have more bills to keep track of — and pay.

IF YOU PAY IN FULL

If you pay off your full balance when it’s due, you’ll want a card with a grace period. That’s the amount of time — by law at least 21 days — between the date your bill is mailed to you and the date your payment is due. If there’s no outstanding previous balance, there are no finance charges. This means access to credit really pays off for you, as there’s no fee.

Without a grace period, you’re charged interest from the moment you make a purchase until you pay your bill, even if the previous balance was paid in full.

IF YOU PAY OVER TIME

If you repay only part of your balance, the interest rate a card issuer charges makes a big difference for you. The lowest rate you can find will save you the most money. But be careful. Some cards offer low introductory rates, called teaser rates, which last only six months. The actual, or true, rate is often much higher.

You’ll want to determine when the APR can change, how much warning you’ll be given, and what the new rate will be. New rules limit most retroactive rate increases on unpaid balances, but that protection does not apply if you pay late.

INVESTIGATE FEES

All credit cards have fees of one kind or another. The card issuer must provide a specific list of those costs and when they apply in plain language and in plain sight, usually on the back of your statement. You can avoid some of the highest fees by paying on time and not spending more than your credit limit.

SECURED CREDIT CARDS

If your applications for a credit card are turned down, it may be because you have a history of credit problems. Or it may be that you’ve never used credit and have no credit history. Without a record to evaluate whether you’re likely to pay your balance on time, a card issuer may be reluctant to take a chance.

Either way, one alternative may be to apply for a secured credit card from a bank or credit union where you deposit money in a linked savings, money market, or time account. The bank has the right to draw on that collateral if you fall behind on your payments. You should expect to earn interest at the same rate that the institution is paying on similar accounts that aren’t tied to a secured card.

The cards look the same as unsecured cards, and you use them in the same way.

SECURED CARD PROS AND CONS

There are some potential advantages to a secured card. If you charge regularly and pay your bill on time — especially if you pay the charges in full — you can establish a good credit record. But, for that to happen, you have to be sure that the issuer is reporting your card use to the three major credit bureaus. Not all issuers do.

If you demonstrate you’re a good risk, the issuer may increase your available credit above the required deposit or be willing to switch you to a regular card. If that upgrade isn’t offered after a year, ask about it. You should also check other card providers, as they may now be willing to issue you a card.

There are also some potential drawbacks. You should compare card issuers to be sure you choose one whose secured card costs the least to use. There can be a significant difference among issuers, and some programs are so expensive that you end up having access to very little credit.

The potential expenses you should ask about include:

  • How much is the annual fee?
  • Is there an application fee?
  • Is there an activation fee for using the card initially?
  • Is credit insurance required and what does it cost?
  • What’s the interest rate on outstanding balances?

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