Buying a credit card is like buying a chainsaw – a very useful tool, which is also capable of causing horrendous damage if used recklessly. Unlike chainsaws, credit cards don’t come with a usage manual for safety rules. Let us help you select the right credit card, so you know how to use it safely.
Here are six things you should consider before applying for a credit card:
1. Spending Habits
The first thing that you should reflect upon is your past spending habits. Do you think you will make full monthly payments without fail, or are you the kind of person who is often charged with late fee on bills? What do you intend to use the card for – to pay for all purchases, or only emergencies?
If you think you will be prompt in paying off the balance, then interest rate should not really concern you. You should look for a card with no annual fee and a longer grace period to avoid getting hit with a finance charge. If you think you’ll be late in payments, a card with low interest rate should be your first choice.
If you intend to use the card for all purchases, get one with a high credit limit and generous rewards program. To use it only for emergencies, you should look for a card with low interest rate and low fees.
2. Interest Rate
When you look for the features of a credit card, the interest rate will appear as the APR, or annual percentage rate, which can either be fixed or variable. With a card with a fixed APR, you know that the interest rate will remain same each month, except in situation when you delay your payments or exceed your credit limit. With a variable-rate card, the interest rate can fluctuate.
3. Credit Limit
This is amount of money that a card holder is allowed to borrow from the lender. Your credit limit depends on your credit history – it can range from a few hundred dollars to tens of thousands of dollars. Keeping your monthly expenses in mind, look for a card whose credit limit is broad enough to let you spend without maxing it out. Exceeding the credit limit will hurt your credit score.
4. Fees and Penalties
Card issuing companies will come up with a host of clever ways to make money off you. Common charges on credit cards include transaction fee for balance transfers and cash advances, for increasing your credit limit, or for making payment by phone. Therefore, look for a credit card that charges reasonable fee.
5. Balance Computation Method
If you think you are like to carry a balance, find out how the card issuing company calculates finance charges. The most commonly used way is average daily balance, where the company will track your balance day-by-day, while adding charges and subtracting payments as they occur. At the end, the average of these daily totals is computed and multiplied by the monthly interest rate to calculate the finance charge.
Do not apply for credit cards that calculate the balance using two billing cycles, as this will end up costing you more money in financing fees.
Many card issuing companies offer attractive reward programs to attract potential customers. Look for a card that offers rewards which you will actually use. For instance, if you are a frequent traveler, a card that offers air miles will be good for you. Just keep an eye on whether there is any limit on expiration of rewards.