What started out as a way to avoid carrying cash or checks, known then as "charge cards," has blossomed into the giant credit card industry we know today. With so many cards to choose from, how do you pick the one that's right for you?
Why get a credit card in the first place?
There are four major reasons why a credit card or two is a good thing to have:
- Not having to carry cash or write checks. This may not be a big deal when it comes to your $20 purchases, but it's nice not to have to walk around with $400 when you want to buy a higher ticket item or pay for an expensive dinner. Many places will also not accept a personal check as it is riskier and more time consuming than accepting a credit card.
- Carrying a balance. Though we don't recommend carrying a large balance over a long period of time due to the relatively high interest rate of most cards, it is nice to be able to buy something now and pay it off over time.
- Improving your credit. If you use your cards properly, don't miss payments, and don't overextend yourself, they can and will improve your credit score. Be wary of store credit cards (like GAP, JCPennys, etc.), however, as they can't be used everywhere and often encourage overspending.
- Rewards for spending. Though not all cards offer cashback or rewards for spending, many do. From air travel to toys, cards have started to give back to their customers in order to set themselves apart from the competition. More on that later, but first a quick snapshot of the major players in the credit card game.
The particulars on how to pick
Each of the four major American providers (Visa, MasterCard, Discover and Credit Karma's advertising partner American Express) offer a wide array of credit card choices. Once you've decided on the following, you can then go looking for a card that fits the bill:
- If you are looking to establish credit, either because you don't have any yet or because you are trying to rebuild your score, then look into a "Starter" or "Student" card. Both Visa and MasterCard offer these types of cards. Typically they come with a moderate, fixed interest rate and a low limit: from $500 to $2500.
- If you plan to carry a balance, look for the card with the lowest, fixed rate you can qualify for.
- If you want a new credit card to consolidate other, high-rate cards, then you'll want to search for a card that has a low (or even 0%) introductory rate. This way you can lower your overall monthly payments and get yourself out of the hole. Be careful, however, as when many of these low, into offers end, the rates that follow are higher than you might expect.
- If you want rewards, figure out what kind of rewards you want and how you typically spend your money and go from there. Do you fly a lot? A credit card that gives you air miles or credits towards flights would be a good option. There are also cards that allow a portion of your purchases to go to a specific charity. Cashback cards are great if you use your card often but pay off the balance every month, because typically these cards have higher interest rates or annual fees. Do a cost/benefit analysis starting with how much you expect to spend so you can see whether the rewards will outweigh the costs.
- If customer service is a big issue for you, consider a credit union over a traditional bank. Often credit unions are more customer focused, it's easier to get a real person on the phone, and the majority of the time you'll find lower rates and more relaxed terms due to the financial structure of a credit union.
- And if you're not quite sure where to look or what kind of card is right for you yet, try Credit Karma's Credit Card Search Feature. This feature lists out several credit cards that you may qualify for, along with rate and feature information.
Beware of high fees and rate repricing
Not that you would have thought otherwise, but credit card issuers are out to make money. Says Bill Hardekopf of lowcards.com, "[they] continue to make subtle changes to squeeze a little bit more out of their customers. We're seeing it in late fees, cash advance fees, and default fees."
One such tactic is known as "default repricing," which involves bumping up your interest rate (sometimes as high as 32% APR) in the event that you default on your agreement in some way; most of the time if you're late with a payment or you go over your limit. Bank of America was recently called out in the press for just such an action (see: A Credit Card you Want to Toss), and here is a disclaimer example for the Discover More card (on their website) that speaks to the same thing:
"*If you are late making a payment, we may increase your APRs to a Default Rate. (For billing periods ending after 5/1/08, the Default Rate may also apply if you exceed your account credit limit twice.) Your Default Rates are determined based on factors such as your current purchase APR, your payment history with us and your general credit history. See Card member Agreement for details."
This is in addition, of course, to the penalty fees that are assessed when you are late with a payment or over your limit. Those can be exorbitant as well.
Use credit, but use it wisely
In the end, credit cards are a fact of American life and can often be a good thing as long as they are used correctly and you stay away from cards that come with unfair conditions. More than anything, make sure to carefully read the disclosure information before you sign up. It will save you a lot of hassle in the future.
Again, if you need help choosing a card, or want to see some examples of what was discussed in this article, start with our Credit Card Search Feature.
Happy credit card hunting!
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