Finding the Right Credit Card
It should be no surprise that the biggest month for credit card applications is January, immediately following the holiday shopping season.
"This is the time that many households get their credit card bill and realize just how much they spent during the holidays. They may look for a new credit card to transfer the balance to a lower rate or because they are close to the limit on their current cards," says Bill Hardekopf, CEO of LowCards.com.
If you are considering a new credit card, educate yourself before filling out the first credit card offer that you receive in the mail. Here are some tips for shopping for a credit card:
* The low advertised interest rate is not the rate automatically offered to each applicant. Before starting your card search, look at your credit report and get your credit score. Many credit cards offer tiered rates, based on your credit score. If it is higher than 760 (FICO), you can expect to qualify for one of the lowest interest rates. If your score is less than 680 (FICO), you can expect to get one of the highest rates.
* Take the time to read the fine print in the terms and conditions. This contains important information about the real card you are agreeing to, not just the offer that sounds good in promotions and advertisements. For example, the issuer can change your rate at any time for any reason, and they can dramatically increase your rate if you have a late payment with them or any other lender. You will also find information about the APR you might be offered and other rates and fees.
* Don't apply for multiple cards at one time. Creditors are wary of multiple applications and several applications can decrease your credit score. Apply for one or two, and if you don't like the card once you receive it, then cancel the card. If you were turned down, or received a higher rate or lower limit than expected, get a copy of your credit report to see if there are issues you need to correct.
* Credit cards are not "one-size-fits-all". There are many types of credit cards so find the right type of card for your situation. Here are some tips:
1. Low Interest--This is the only choice if you carry a balance. The lower your interest payment, the more you can pay off on your balance and the faster you will eliminate your credit card debt. Avoid low interest cards that charge an annual fee. Since you are only interested in the rate, not rewards, there is no reason to get a card with an annual fee.
2. Low introductory rate--Balance transfers give you a chance to transfer your credit card balance to a card with a lower interest rate. Issuers have cut the introductory period for many cards from 12 to 6 months, and in some cases only 3 months, depending on your credit score. Some cards that didn't charge a balance transfer fee have started to charge a 3% fee with no cap on the amount that you transfer. This fee will be rolled into your balance, so you will pay interest on the fee as well.
Calculate how long it will take to pay off your debt. If you max out your payments and pay off your balance in less than a year, take advantage of a card that offers a 0% intro rate for 12 months. However, the trick is to avoid using the card for more purchases during that time. These new purchases will be charged a much higher interest rate, and this can wipe out the financial benefits of transferring your balance.
If it will take more than a year to pay off your balance, look for a card that offers a low fixed rate on balance transfers. Realize that one late payment can change your rate to a punitive default rate that can be as high as 30%.
Many cards will allow you to apply for the card first to see what your offer will actually be and transfer your balance within a few months to a year. Keep in mind that the median credit limit is $13,500. You may not be able to transfer your total balance, and may end up with a remaining balance on your old card.
3. Rewards--Reward cards are a good choice only if you pay off your balance every month. If you carry a balance several times during a year, look for a lower interest card, not a reward card.
When choosing a rewards card, look first at your annual usage on a credit card. If you charge less than $5,000 per year, your best option is a general reward card like Blue from American Express. You can select rewards on lower levels like gift cards to restaurants and retail stores that will be useful to you. You can earn these gift cards in the first year. If you have an airline reward card and charge $5,000 or less each year, it could take 5 years to earn a free ticket (most cards
offer a free, domestic airline ticket for 25,000 points). If your usage is more than $50,000 per year, look for a card with unlimited rewards. Some cards cap rewards starting at $50,000. Or, you can have two different reward cards and get cash and a free airline ticket.
Finding the best reward card is difficult because the offers are hard to compare. For comparison, assume that the average reward percentage is 1%. Plug your credit usage into the reward formula to determine if that card would offer you more or less than 1%. If it is more than 1.5% of what you spend, the card could be a good deal for you.
Hotel reward cards have the most generous points distribution for everyday purchases, general purchases, and bonus points. Some hotel cards, like Choice Privileges Visa and Starwood American Express, allow points to also be redeemed for airline tickets or retailer gift cards.
"This is the time that many households get their credit card bill and realize just how much they spent during the holidays. They may look for a new credit card to transfer the balance to a lower rate or because they are close to the limit on their current cards," says Bill Hardekopf, CEO of LowCards.com.
If you are considering a new credit card, educate yourself before filling out the first credit card offer that you receive in the mail. Here are some tips for shopping for a credit card:
* The low advertised interest rate is not the rate automatically offered to each applicant. Before starting your card search, look at your credit report and get your credit score. Many credit cards offer tiered rates, based on your credit score. If it is higher than 760 (FICO), you can expect to qualify for one of the lowest interest rates. If your score is less than 680 (FICO), you can expect to get one of the highest rates.
* Take the time to read the fine print in the terms and conditions. This contains important information about the real card you are agreeing to, not just the offer that sounds good in promotions and advertisements. For example, the issuer can change your rate at any time for any reason, and they can dramatically increase your rate if you have a late payment with them or any other lender. You will also find information about the APR you might be offered and other rates and fees.
* Don't apply for multiple cards at one time. Creditors are wary of multiple applications and several applications can decrease your credit score. Apply for one or two, and if you don't like the card once you receive it, then cancel the card. If you were turned down, or received a higher rate or lower limit than expected, get a copy of your credit report to see if there are issues you need to correct.
* Credit cards are not "one-size-fits-all". There are many types of credit cards so find the right type of card for your situation. Here are some tips:
1. Low Interest--This is the only choice if you carry a balance. The lower your interest payment, the more you can pay off on your balance and the faster you will eliminate your credit card debt. Avoid low interest cards that charge an annual fee. Since you are only interested in the rate, not rewards, there is no reason to get a card with an annual fee.
2. Low introductory rate--Balance transfers give you a chance to transfer your credit card balance to a card with a lower interest rate. Issuers have cut the introductory period for many cards from 12 to 6 months, and in some cases only 3 months, depending on your credit score. Some cards that didn't charge a balance transfer fee have started to charge a 3% fee with no cap on the amount that you transfer. This fee will be rolled into your balance, so you will pay interest on the fee as well.
Calculate how long it will take to pay off your debt. If you max out your payments and pay off your balance in less than a year, take advantage of a card that offers a 0% intro rate for 12 months. However, the trick is to avoid using the card for more purchases during that time. These new purchases will be charged a much higher interest rate, and this can wipe out the financial benefits of transferring your balance.
If it will take more than a year to pay off your balance, look for a card that offers a low fixed rate on balance transfers. Realize that one late payment can change your rate to a punitive default rate that can be as high as 30%.
Many cards will allow you to apply for the card first to see what your offer will actually be and transfer your balance within a few months to a year. Keep in mind that the median credit limit is $13,500. You may not be able to transfer your total balance, and may end up with a remaining balance on your old card.
3. Rewards--Reward cards are a good choice only if you pay off your balance every month. If you carry a balance several times during a year, look for a lower interest card, not a reward card.
When choosing a rewards card, look first at your annual usage on a credit card. If you charge less than $5,000 per year, your best option is a general reward card like Blue from American Express. You can select rewards on lower levels like gift cards to restaurants and retail stores that will be useful to you. You can earn these gift cards in the first year. If you have an airline reward card and charge $5,000 or less each year, it could take 5 years to earn a free ticket (most cards
offer a free, domestic airline ticket for 25,000 points). If your usage is more than $50,000 per year, look for a card with unlimited rewards. Some cards cap rewards starting at $50,000. Or, you can have two different reward cards and get cash and a free airline ticket.
Finding the best reward card is difficult because the offers are hard to compare. For comparison, assume that the average reward percentage is 1%. Plug your credit usage into the reward formula to determine if that card would offer you more or less than 1%. If it is more than 1.5% of what you spend, the card could be a good deal for you.
Hotel reward cards have the most generous points distribution for everyday purchases, general purchases, and bonus points. Some hotel cards, like Choice Privileges Visa and Starwood American Express, allow points to also be redeemed for airline tickets or retailer gift cards.
Posted by Lynn at
9:14 PM
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