Evaluating Credit Cards
Credit cards are a convenient part of the financial lives of many individuals. They also are the subject of intense marketing campaigns from all types of financial organizations. Your mailbox is probably often filled with offers. Choosing the right credit card and using it wisely are important, and can make big differences in your finances.
What to look for
The marketing materials in your mailbox can be confusing and sometimes misleading. Choosing the card that is right for you should be dependent on several factors - fees, rates, and benefits for using it. Few credit cards will rank highest on each of these factors. You should choose the card that ranks highest based on how you use it. You should also consider the organization providing the card.
Many cards are offered with no annual fees while others charge up to $50 or $60 per year. Ideally, you would want to choose a card with no annual fee. There are also fees companies charge for late payments. Be sure to check the terms of the credit card agreement, especially if you are occasionally late with a monthly payment.
Obviously, if you carry over balances and are subject to finance charges, you want a card that offers a low rate. Rates can vary by more than 10 percentage points and can exceed 20 percent. You should also be very careful of low teaser rates, or special rates for a limited time if you transfer balances from another card. Another way issuing companies increase the amount you pay is by how they calculate the interest. Be sure to read the details of the agreement.
Benefits for use
Using a credit card can bring the rewards of gift cards, merchandise, air travel, and more. A rule of thumb is that the benefits are usually worth about 1 percent of the charges. If a card with these types of benefits is important, make sure the benefits are those that you will use and that the other aspects of the card do not offset the benefits.
Assume Bill Smith is evaluating three cards with the characteristics listed below. Also assume Bill has an average balance of $3,000 on which he pays interest and that he charges $2,000 per month.
Card A - No annual fee, 18 percent interest, no benefits for using it.
Card B - No annual fee, 12 percent interest, mileage benefits for using it.
Card C - Annual fee of $50, 10 percent interest, discounts on electronics for using it.
|Card A||Card B||Card C|
As you can see, the differences are substantial. The differences become even more pronounced if the unpaid balance or amount of usage is higher.
Be sure your credit card provides the right combination of fees, rates, and benefits. If you do not carry over balances and pay finance charges, you might be willing to accept a card with high interest rates and maybe even an annual fee if the benefits were your main focus. However, if you normally pay finance charges or interest, pay extra attention to the interest rate.
You should evaluate the company providing the card. Be sure their level of service is acceptable. You may also want to consider the benefits of using a card offered by the financial institution where you do most of your banking. Having the convenience of dealing with one institution for all your financial needs can be nice.
The example above is quite simple, and the cards are not meant to represent those offered by any institution. Be sure to read and understand the terms of any credit card before accepting it.