MONEY TALKS - Whether you are applying for your first credit card or looking to upgrade to a better one, it’s important to understand your needs as well as the terms of the card before submitting an application. Credit cards can be a very handy tool to have in your toolbox, but when misused, can inflict significant damage. Depending on your spending habits and intended use for the card, one card may be more beneficial to own than another. When it comes to evaluating credit cards, the devil is in the details; here are 4 things to research before getting your next credit card.
Annual Percentage Rate - Annual Percentage Rate, or APR, is the interest rate you’ll pay if you don’t pay off your credit balance in full each month. When comparing the APR from one credit card to another it’s important to note that the APR may vary depending on how the card is used. In an effort to entice new account holders, many cards are offering introductory APRs such a 0% for six months. However, after the honeymoon phase is over, these rates generally jump to 15% - 30%. Moreover, the APR for balance transfers may be different from the new purchase rate. And if you plan to take a cash withdrawal, the APR on cash advances will almost certainly be higher than that of purchases and balance transfers.
Fees - One of the first things you should check before applying for a credit card are the annual membership fees. These membership fees can range from $0 to $600 per year, regardless of whether or not you actually use the card. Pay strict attention to the terms of your offer because it’s not uncommon for a credit card to offer a $0 membership fee for the first year, after which it will revert to the original amount. If you are looking to roll your balance from one credit card to another, take a close look at the balance transfer fee. These are fixed transaction fees based on the balance being carried over. A balance transfer fee of 3% is fairly standard; however, some cards may also have a minimum fee such as $5. Similarly, cash advances generally have a transaction fee based on the amount of each cash advance which often range from 3% to 5% and are also subject to a minimum fee. Lastly, if you are planning on traveling internationally, you should determine if the credit card has any foreign transaction fees. Some cards charge 3% of the amount of each transaction in U.S. dollars while others have no foreign transaction fees.
Rewards - One of the major advantages of using a credit card are the lucrative reward programs. Traditionally, credit card reward programs pay their owners based on points, miles, or cash back. The key aspect here is to understand the value you are getting in comparison to what you are paying. Unfortunately, comparing points to miles, or miles to cash, or cash to points can be rather cumbersome. Even when comparing apples to apples such as points to points, all cards are not created equal. For example, if 50,000 points from Card A can get you $500 worth of rewards, each point is worth 1 cent ($500 ÷ 50,000 points = $0.01 per point). However, if 50,000 points from Card B can get you $1,000 worth of rewards, each point is worth 2 cents. When determining which card provides you with the most value, begin with the end in mind. Figure out exactly what you are looking for whether its airline tickets, hotel points, or simply cash back before you start shopping for a new credit card. Once you know what you want, then you can begin comparing one card to another. Rather than crunching the numbers yourself, you may be best served searching the internet for a valuation guide or credit card comparison tool.
Additional Benefits - In addition to the rewards benefits described above, many credit cards offer additional perks free of charge. If you are a frequent traveler, you may want to research what cards offer travel insurance. Credit card travel insurance programs reimburse cardholders for cancelled trips, missed connections, and lost coverage. Other travel programs include elite status at hotels such as Hilton & Marriott as well as discounts and upgrades at rental car agencies like Hertz.
When determining which credit card is best for you, not only is it imperative to understand the terms and conditions of the card, but perhaps more importantly, you need to have a good sense of how you will be using the card. For example, if you are purchasing a $900 television, a credit card with a 0% APR for 6 months may suite your needs presuming you can make the $150/month payment. However, if you spend $6,000 refurnishing your home, it’s unlikely you will have the cash flow to pay off your balance in 6 months, so you may be better served finding a card with a longer introductory APR or lower ARP on new purchases. Whichever card you decide on, be sure to pay attention to the fine print not only to avoid any penalties and fees but also to get the most benefits from the card.