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.

Will Senate Hearings Lead to More Credit Card Changes ?

Will Senate Hearings Lead to More Credit Card Changes ?

Today, the Senate Permanent Subcommittee on Investigations
again turns its investigative attention to the practices of
the credit card industry. This time it is focusing on unfair
interest rate increases. Consumers are complaining that
issuers unfairly raise interest rates after a slight drop in
the credit score, even if they have a good payment history.
The investigations are working. Acting in advance of this
hearing, last week Chase announced that it will eliminate
this practice of repricing. This change is effective on
March 1, 2008.

In March 2007, this subcommittee examined practices related
to credit card grace periods, excessive fees and interest
charges assessed against debt that was paid on time. As a
result, Chase ended its two- cycle billing policy and it no
longer charges over-the-credit-limit fees for customers who
have been in a "chronic overlimit position" for over 90
days. Citi ended its universal default policy and its "any
time for any reason" rate increases.

Despite the hearings, government attention and even actions
by the Federal Reserve to lower interest rates, issuers
continue to find ways to raise rates and fees.

Here are a few examples of recent rate and fee increases:

* Discover dropped the intro rate for purchases from 12
months to 6 months, effective December 1

* Capital One made a number of changes which all went into
effect on December 3. They raised the interest rate on
consumer cards by .5%; increased its cash advance fee from
19.3% to 22.9%; and increased the fees by shrinking the
tiers for late payment fees and eliminating the tiers for
over the limit fees.

* Bank of America recently announced that it will no longer
cap balance transfer fees, effective March 2008
"The credit card industry is a big business, not a charity,
and the issuers are in business to make money from their
cardholders. They also take risks by lending money and
should be compensated for that," says Bill Hardekopf, CEO of
LowCards.com. "But some of these their practices are very
unfair.

"Cardholders do have the power to call and ask for lower
rates. If this doesn't work the first time, pay your bills
on time, then ask again in a few months. If persistence and
good payment history don't get a lower rate, then it is time
to shop around for a new credit card."

Here are some additional changes that the Senate should
investigate to help consumers:

1) Apply monthly payments to highest rate balances first.
"If Congress was really serious about helping consumers,
they would change the way credit card issuers apply monthly
payments to the outstanding balance. Applying the monthly
payment to the balance with the highest interest rates would
save cardholders a lot of money on interest charges and help
them get out of debt much faster," says Hardekopf.
Currently, the monthly payment is applied to the lowest rate
balance first before paying off the balance with the highest
interest rate. That means the balance will continue to
accrue unpaid interest as long as you use the card to make
purchases. This practice keeps you paying on your balance
with the highest interest rate until the moment you pay off
your total balance.

2) Make the Terms and Conditions easy to understand. "We
hope that Congress is able to encourage or force the
industry into making the terms and conditions easier to
understand. If you don't read the fine print and only judge
the card by the sometimes misleading large print in the
promotions, you may be surprised by the card you actually
get," says Hardekopf. For example, the Chase Business Cash
Rewards card promotes "up to 5% cash back," but that 5% is
only on $500 worth of purchases made each month after you
have spent $2000 during that month.
This also applies to notifications about rate and fee
increases. "It is interesting that the letters describing
new debt opportunities are easy to read, but the
notification of rate increases or changes in the terms of
your card are so difficult to understand that they almost
require a visit to your lawyer to find out what they mean
for you. The notifications are also sent in a plain white
envelope that is easy to miss."

3) More protection for consumers against rate increases.
"Credit card issuers say in their terms and conditions that
they can increase your rate at any time for any reason. If
they decline your request for a lower rate, you can close
your account, but there is nothing else you can do about it.
The rate increase may spread to your other loans because
your other creditors can check your credit report, see the
increase as an indication of increased risk and increase
your rate with other loans as well," says Hardekopf. "All
credit issuers should drop the penalizing practice of
universal default."

4) Re-institute the cap on balance transfer fee. Until the
past year, most issuers did not charge a fee for balance
transfers; it was an enticement to encourage you to switch
from another card. Last year, they started adding the
balance transfer fee with a cap; now a number of issuers
have dropped the cap completely and charge 3% on the entire
balance that you transfer.

5) Pay balance transfer fees up front out of the amount
transferred. Issuers roll the fees into the loan, so you not
only pay the fee, but you will also pay interest on that fee
until you pay off the loan.

6) Lengthen the grace period. Over the years, issuers have
reduced the grace period from 30 days to 25 days and now,
many have lowered it to 20 days. It varies by issuer and it
is now very easy for anyone, regardless of income or payment
history, to miss a payment. "The grace period adds to the
confusion because it varies by issuer. It would be nice to
have a standard 25 day grace period."

7) Regulate the fees charged for subprime cards. A subprime
card does not benefit the cardholder if most of the payment
goes to fees, leaving very little for credit. These cards do
not report to credit bureaus and offer no help in building
up credit history. "Subprime credit card offers are just
quicksand for those who are already struggling with debt,"
says Hardekopf.

8) Stop the practice of convenience checks. Credit card
issuers aggressively promote the use of convenience checks,
making the checks very easy to use without clearly stating
what the user is signing up for. "They send a letter that
tells of the exciting things you can buy, or the debt you
can easily consolidate by using the checks. However, what
they don't tell you in the big print is that consumers are
assessed an additional fee of 2% to 5% of the transaction
just for using these checks," says Hardekopf.

LowCards.com ( http://www.lowcards.com ) is a free,
independent website that helps consumers easily compare
credit cards in a variety of categories such as lowest
rates, rewards/rebates, balance transfers and lowest
introductory rates. It also gives an unbiased ranking and
review for each card, making it easy for consumers to
compare more than 150 credit card offers and apply securely
online. It also provides advice about credit card and debt
issues, news, and credit card updates. Created by Hampton &
Associates, the company has been analyzing the credit card
industry and supplying objective websites on various
consumer expenses for over seven years.