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Wednesday, May 20, 2020

How to Pick a Credit Card


Don't pick a card just because it offers a zero annual fee. With the exception of airline, poor credit and charge cards, almost all credit cards offer a zero annual fee these days.  Credit card issuers know that a zero annual fee is a big selling point with consumers.  Competition among card issuers demands a zero annual fee, so rarely will you find a credit card with an annual fee anymore.  This doesn't mean you should reject a card because it comes with a fee.  For example, airline cards almost always charge a fee to defray the cost of administering the frequent flier programs.

Don't pick a credit card just because it has a low introductory rate.  Credit card issuers know that low and zero introductory rates are big selling tools because consumers love them. That's why more and more card issuers offer a special introductory rate or "teaser" rate.  What is nice for the consumers is that fierce competition among the card issuers is making the introductory rates better and better (and longer and longer).  But don't let the introductory rate cloud your judgment.  For example, suppose two credit cards offer the following introductory rates:  Card A offers a 4.9% APR for six months, then a 11.99% purchases APR. Card B offers a 0% APR for six months, then a 13.99% purchases APR.   Your inclination might be to pick Card B with the zero interest for six months; however, if you intend to carry a balance on your credit card for much longer than six months, you should always choose the card with the lowest purchases APR, even if it doesn't offer the lowest introductory rate.   Doing so will result in saving you literally hundreds or even thousands in interest charges in the long run if you always carry a big balance on your credit cards.  Remember, the introductory rates are only a fraction of the total time the average person holds on to and uses a credit card.    From now on when you receive literature from a credit card company offering a special introductory rate, go immediately to the terms and conditions and find out what the regular rates are that kick in after the special introductory period is over before applying for the card. 

Don't pick a credit card because it offers great rewards or cash back:  Credit cards that offer cash back or rebates, such as discounts on future automobile purchases, etc., sound great, but they are a very poor deal if the purchases APR is high and you have to jump through many hoops to qualify for the rewards.  Too often the rewards are just another selling point for the card issuers, and upon reading the fine print contained in the terms and conditions, one might find quite that the prizes don't come easy. If someone came up to you and said, "I'm going to make a deal with you.  Give me the $500 you have in your wallet now, and three years from today, I'll give you back $20." You would laugh, say "no thanks" and walk away, but consumers naively accept a similar deal with many of these types of credit cards.
Accept a cash rebate card only if it offers a decent purchases APR.  If the purchases APR is acceptable to you, and the card happens to offer rewards, too, then it is a good card, but don't let the idea of saving, for example, $500 on your car purchase three years from now, convince you to accept a card with a high purchases APR.   If the purchases APR is 24% and you have to maintain a big balance to earn reward points or get cash back, you will incur much more in interest charges than you will ever receive back in cash or future discounted purchases.  

DO pick a credit card with the lowest APR possible.  If you are one of the 30 percent of Americans who pay their credit card balances in full each month, the interest rate is irrelevant to you, since almost all cards come with a grace period allowing a period of time to pay the balance in full without incurring interest fees.  However, if you regularly carry a balance on your credit cards, the interest rates [the purchases, balance transfer and cash advance APRs] should always be your number one consideration in choosing a credit card.

Low Interest Rate Credit Cards.  To qualify for a low interest rate credit card one must have a very good credit rating.   But this doesn't mean that the credit card issuer doesn't try to sneak some hidden fees in on you.  The annual fee. Some cards might offer a low interest rate but require you pay an annual fee of $50 or $60.  When the expense of the annual fee is factored in, the effective interest rate is higher than the actual rate stated.  The low introductory rate.  Don't let the low introductory rate fool you in to thinking the card is a good deal.  If the rate jumps from 0% to 15% after six months, it isn't a good deal.  Card issuers know that low introductory rates are great lures.  Many people will spend spend spend during that low introductory rate period.  Then suddenly, the introductory period ends, and your monthly minimum payment jumps dramatically.  Just ignore the low introductory rate when you're picking a card unless you're planning to transfer a balance from another card so you can pay it off rather quickly.  The card might have high balance transfer fees.  Some cards that offer low balance transfer rates sting you with a high balance transfer fee -- sometimes as high as 3% of the balance transferred.  Also, watch out for a low introductory rate on transferred balances that suddenly increases dramatically --- higher than the average rate for all cards.

Airline and Travel Cards.  The typical airline or travel card allows you to earn one mile for every dollar you spend making purchases using the card. The miles you earn are good for discounted airline tickets, free travel or discounted car rentals and even hotel stays.   You must accumulate a certain number of miles, say 10,000, before you can redeem them.  Some card issuers will give you double miles or a bonus on certain purchases.  For example, you might earn X number of miles when you sign up for the card.  You might earn double miles if you rent a car or buy airline tickets.  You might earn double miles if you fly on a certain airline.  Travel and airline cards usually come with added perks.  The typical perk is free car rental insurance and lost luggage insurance every time you use the card to purchase airline tickets or rent a car.  Some have exclusive arrangements with a specific airline or car rental company. 

The following are hidden fees and costs associated with airline and travel cards:  (1) The annual fee -- Although most regular credit cards offer a zero annual fee, travel and airline cards almost always have an annual fee -- usually around $65.00 or more.  The purpose of the fee is to defray the cost of giving away free miles and travel perks;  (2) High regular rates.   A number of credit card companies are offering rates as low as 7% these days, but you will have a hard time finding such a low rate with a travel or airline card.  Interest rates on travel cards are always higher than average to defray the cost of giving away all those free miles.  Airline and other cards that offer freebies and rewards are just a gimmick.  You have to use the card quite a bit, rack up lots of interest charges, and pay a high annual fee to get a few free miles and perks.   The best credit card in the world is one with no annual fee, a relatively low interest rate and no perks.

Secured Credit Cards.  If you have bad or no credit, the only Visa or MasterCard you are likely to be approved for is either a secured credit card or a credit card with very high fees and interest rates. This latter type of card is a bad choice, but is often picked by those with bad credit.  It is almost always a better option to choose a secured or partially secured card rather than one that advertises itself as unsecured, yet charges high application fees.  With a secured card you will one day get your deposit back (provided you live up to your end of the agreement), plus a small bit of interest earned while the issuer holds it as collateral. You will never get the application fees associated with an unsecured card back.

Another problem with cards that come with high application fees is that, in most circumstances, those fees are charged to your credit card when you are approved.  They eat up all or most of your available credit, accrue interest at a very high rate, and limit your usage of the card until they are paid down.  These application fees are, in reality, non-refundable security deposits.  Most of the unsecured credit cards for people with bad or no credit are very bad choices and take advantage of those who cannot qualify for a better card. We advise you to avoid them and choose a secured card or partially secured card rather than pay high application and annual participation fees.

"Cash Back" Credit Cards.  Credit cards that offer cash back or rebates, such as discounts on future automobile purchases, etc., sound great, but they are a very poor deal if the purchases APR is high and you have to jump through many hoops to qualify for the rewards.  Too often the rewards are just another selling point for the card issuers, and upon reading the fine print contained in the terms and conditions, one might find quite that the prizes don't come easy. If someone came up to you and said, "I'm going to make a deal with you.  Give me the $500 you have in your wallet now, and three years from today, I'll give you back $20."  You would laugh, say "no thanks" and walk away, but consumers naively accept a similar deal with many of these types of credit cards.  This doesn't mean that all cash back cards are bad.  One way to win with a cash back card is to pay your balance off each month.  This way you save interest fees while earning points good for free merchandise, trips or rebates.

If you do habitually carry a balance on your credit card, then accept a cash rebate card only if it offers a decent purchases APR.  Some cash back cards do have above average interest rates to defray the cost of giving away freebies.   If the purchases APR is acceptable to you, and the card happens to offer rewards, too, then it is a good card, but don't let the idea of saving $500 on your car purchase three years from now or getting a free radio, convince you to accept a card with a high purchases APR.  The worst type of reward card:  One with a high purchases APR, say 19% or above, and requires you to maintain a big balance to earn reward points or get cash back.


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