From building a credit history to financing a short-term purchase, a credit card can really come in handy, but the sheer number of options available can be overwhelming – and leave you more than just a little confused. With so many different credit cards and rewards programs out there, how do you know which one is right for you? Here we help you sort out the choices by looking at the top four considerations for choosing a credit card.
Credit Card Consideration #1: Will you carry a balance or not?
One of the key considerations in selecting the right credit card is determining how you will use it. Ask yourself if your plan will be to pay off the card each month or to carry a balance. The answer to this important question will help you decide whether to apply for a card with a rewards program or target a low interest rate.
“If you’re going to carry a balance, choose a card that doesn’t have a rewards program, because those offer lower interest rates,” says Julie Bruning, vice president of consumer lending at SAC. “But if you’re going to pay off your balance each month, then the rate matters less, and it makes sense to choose one with a rewards program.”
For instance, a card with a cash-back rewards program may give you 5% cash back on your purchases, but it could also come with a 29% interest rate, whereas credit unions are legally bound to an 18% cap for all loans, including credit cards, and the average no-frills card will charge you between 10 and 12%. It’s easy to see how it’s best to skip the rewards if you aren’t paying the card off in full each month.
Credit Card Consideration #2: What are the associated annual or separate fees?
We all know that credit cards come with fees, but it’s important to understand what the fee structure looks like for each card (almost every card is different!). Does the card you’re considering have an annual fee? If it has a rewards program, there may be a separate fee for that as well. Possible actions down the line can also mean paying card fees. For example, some cards charge balance transfer fees and most have fees when you’re late with your monthly payment. If you think you might use cash advances, find out if the card charges a fee for that service.
Credit Card Consideration #3: Will this be an emergency-only card?
If you’re someone who will only use your credit card for emergency situations, consider selecting a card that has low or no annual fees, as well as a low interest rate. These card features will be important in the event that an emergency payment forces you to carry a balance on your card for a little while.
Credit Card Consideration #4: How will this impact your long-term financial health?
When you’re evaluating how to choose the right credit card, consider how it will affect other areas of your finances. For instance, you may be tempted to open a card at each of the department stores you frequent, but opening a lot of cards at one time can negatively impact your credit score. Your score will also drop when your unpaid balance reaches about 30 percent of your limit or when you have frequent late payments. (For more information about your credit score, see “Credit scores: A digital finger on your financial pulse.”)
These seemingly small actions can have big financial implications. “Your credit score affects things like the interest rate on your mortgage – a factor that could add tens of thousands of dollars to your payments over the course of the loan,” says SAC FCU’s Bruning.
Know what you’re getting into when you swipe that piece of plastic.
In addition to the four considerations listed, find out:
- What will your minimum payment be if you max out the card?
- Is the interest rate fixed or variable? When can it change?
- When do penalty rates kick in, such as for late payments?
- How long does it take to clear those penalty rates?
A reputable credit card provider will make the answers to these questions clear and readily available. Take the time to talk with someone at your credit union about the factors listed here. Once you know how you’ll use the card and details such as fees, rewards, and interest, you’ll be able to choose a card that’s right for you.
Rewards? Low fees or low interest? What’s most important to you when choosing a credit card?
Special credit card offer from SAC FCU
When you open a card with SAC FCU, you’ll get a 1.99 percent interest rate for six months on any balance transfer made within 30 days, and there’s no balance transfer fee. Plus when you open a card in September, you’ll get a 1.99 percent rate on any purchase you make with that card in 2013.
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