This article is part 2 of the series Credit Cards 101.
Your credit card will either work for you or against you. While some of it depends on the credit card itself, a lot of it depends on you, starting with the way you choose your credit card.
Once you’re ready for a new credit card, whether it’s your first or your tenth, the one thing you should not do is let your credit card pick you. That means not responding to phone, mail, and email credit card solicitations without first having shopped around for the best credit card terms.
If you haven’t opted out of credit card offers, start saving up the most attractive ones. Then, once you have a few of them stockpiled, go through them all and look at the features of each, noting the ones that meet your lifestyle.
How Will You Use Your Credit Card
- If you plan to carry a balance on the credit card, meaning you won’t pay off the balance in full at the end of the month, choose a card with a low interest rate.
- If you plan to pay off your balance in full each month, look for a credit card with a good rewards program and a low (or no) annual fee. A high interest rate on this card won’t matter since you won’t carry a balance.
- If you need to transfer a balance, look for a credit card with a low balance transfer interest rate. Be careful because low balance transfer rates, often known as “teaser” rates, increase after a certain period of time, typically 12 months or less.
Credit Card Features That Matter Most
Aside from selecting a credit card to match your lifestyle, you should also look at the features of a credit card to make sure they’ll benefit you. Keep in mind, you may have to trade off one feature for another to get the best card for you.
- Interest Rate. The credit card interest rate affects the cost of carrying a balance on the credit card. The higher your interest rate, the higher the cost. Ideally, you’d like a credit card with a low interest rate, but, like I said before, if you don’t plan to carry a balance, a high interest won’t hurt. Most credit cards have a different, usually higher interest rate for balance transfers and cash advances.
- Annual Fee. Some credit cards have an annual fee that’s assessed on a yearly basis. You may be able to have the annual fee waived by charging a certain amount of money on your card during the year. If you must pay an annual fee, your credit card should benefit you in some other way, e.g. rewards.
- Grace Period. The grace period is the length of time you can to pay your balance in full without incurring a finance charge. If you plan to pay your balance in full each month, look for a credit card that has a longer grace period, allowing you more time to pay your bill. Some types of balances, like cash advances don’t have a grace period. You might also lose the grace period on new purchases if you already have a balance on your credit card. This means you’ll start accruing interest on your balance the day you charge it.
- Credit Limit. The maximum amount you can charge on your credit card without receiving a penalty is called the “credit limit.” You might need a higher credit limit depending on the amount of purchases you plan to make each month. Or, if you’re just starting out with credit, it’s a good idea to start with a low credit limit until you learn to manage credit.
- Insurance Protection. Some credit cards come with different types of insurance protection that covers you in certain events. For example, car rental insurance will cover damages to a car that’s rented with your credit card. Travel accident insurance covers cost of medical assistance when you’re travelling. Watch out for unnecessary insurance offered for a price including credit card insurance to pay for your credit card balance after a disability or unemployment.
The Types of Credit Cards
The type of credit card will also greatly influence your choice.
- Regular credit card: doesn’t have many features and doesn’t require a security deposit for the credit limit.
- Secured credit card: is typically a good choice for those starting out with credit or who have bad credit. Secured credit cards require a deposit to secure the credit limit. These cards often have higher interest rates and annual fees.
- A remium credit card sometimes has an annual fee and has many features and benefits above a regular credit card. Premium credit cards often have higher credit limits require a good credit rating.
When it’s time to pick a credit card, you shouldn’t look at just any one feature like the interest rate or the grace period. Instead, you should to look at all the features together because that’s what makes a credit card good or bad for you. Since there’s not a one-size-fits-all type of credit card, you have to select the one that’s best for your lifestyle.