Choosing the Right Credit Card
With so many credit cards to choose from, selecting the right card that suits your needs and budget can seem overwhelming. Interest rates, fees, terms and rewards can vary greatly, so it’s important to research and understand your options. Your spending habits, budget, and reasons for obtaining a credit card affect your selection. Do you need the card to build credit, for traveling or business expenses, or for a planned purchase that you will pay off over time?
- Annual Percentage Rate (APR): this is the interest rate charged on any outstanding balance carried over to the next month. You can avoid interest charges by paying the full statement balance by the due date. If you plan to pay your balance in full every month, you might select a card with a higher APR and no annual fee over a card with an annual fee and a lower APR.
- Introductory APR: some cards offer a lower introductory APR that changes to a higher rate after a specified number of months.
- Cash Advance/Balance Transfer APR: most cards specify a higher APR for cash advances or balance transfers. In addition, there may be a cash advance or balance transfer fee involved, and the interest charges may begin immediately rather than after the grace period.
- Penalty APR: the APR may increase to a higher penalty rate if the card is not managed properly, such as frequent late or missed payments.
- Rewards Programs: many card issuers reward cardholders by providing points based on the purchase dollar amount. Points can be redeemed for anything from gift cards to airline tickets. However, be careful not to let the enticement of a rewards program cause you to overspend.
- Annual Fee: some card issuers charge an annual fee, which can be more on a card that offers rewards. Consider the annual fee when determining the true value of rewards programs.
- Credit Limit: your credit limit is the maximum balance allowed on your card at any given time. The limit is typically based on your credit history and income level. Exceeding your credit limit can result in a fee. Remember, just because you have a certain credit limit doesn’t mean you should use it. If you are worried your credit limit might tempt you to overspend, ask your card issuer to lower your limit.
- Other Fees: other common fees include late payment, over the credit limit, balance transfer, cash advance and foreign exchange fees for purchases made outside the United States.
Using Credit Cards Responsibly
Credit cards offer many advantages when used responsibly. They provide access to immediate cash in the event of an unexpected expense, with the convenience of making payments over time. Credit cards are essential when traveling, especially when renting a car or reserving a hotel room. Most credit card companies provide extra benefits, such as rewards for purchases, extended warranties and detailed tracking of your purchases by category or retailer. Plus, you build a strong credit history as you make payments on time.
They are also wrought with danger if used carelessly. Swiping your card at the checkout counter may disguise the fact you’re spending real money, but when your statement arrives, with a balance you can’t ignore, reality sets in quickly. Many people in their 30s are still paying for uncontrolled purchases they made in college. Consider this: if you charged a $1,000 shopping spree on a credit card with a 20 percent APR, and paid only the minimum 3% each month, it would take eight years to pay off. Plus you would have paid another $850 in interest.
Living with overextended credit card debt is costly and the strain to pay it off can affect your quality of life by creating stress, consuming your current income and limiting your ability to borrow in the future.
Knowing the potential pitfalls can help you enjoy the benefits of a credit card without falling into the trap of unmanageable debt.
- Control Your Purchases: think carefully about what you are purchasing before you swipe your card. Avoid charging day-to-day items that you consume quickly, like meals and entertainment, or splurges that you can’t afford.
- Keep Track of Purchases: purchases can add up quickly if you aren’t paying attention. Sign up for online access to monitor your balance. Review transactions for accuracy and promptly report any errors to your card issuer.
- Make Payments On Time: good credit depends on making every payment on time. Plus, late payments can result in extra fees and even an increase in your APR. If you pay by mail, mail your payment 10 days before the due date. Paying online will reduce the risk of a late payment.
- Pay More Than the Minimum Payment: pay your balance in full each month, or pay as much as you can to minimize interest charges. Paying only the minimum due each month means you’ll be paying interest, with little progress towards paying off the original amount. Your credit card statement indicates the number of months it will take to pay off your balance if you make only the minimum monthly payment.
- Stay Well Below Your Credit Limit: ideally, you won’t carry a balance from month to month, but if you do, strive to keep your balance below 25 percent of your credit limit. Your credit score is partially based on your outstanding balance as a percentage of your credit limit, so keeping a low balance will improve your score.
- Avoid Opening Multiple Cards: opening multiple credit cards to receive a gift or discount is never a good idea. Having multiple cards makes it more difficult to keep track of your debt and monthly payments, and too many credit cards can reduce your credit score.
- Report Problems Immediately: if your card is lost or stolen, or if you don’t recognize a posted transaction, contact your card issuer immediately. Your liability for unauthorized charges is limited if you report the issue promptly. Most card issuers have a 24-hour, toll-free number.