17 May 2009

Choosing a Credit Card

In this era of the Great Recession (yes, Business Week refers to it as such), there are many of us struggling to repay our existing credit card debt. While this may be the norm for many of us, I understand that there are others out there that are willing to take the “credit plunge” and apply for their own card. As with anything, there are many out there from which to choose; just be sure to choose wisely, because a misinformed or hasty decision could cost you dearly.

Now, in a perfect world, we would use the card for purchases and then pay off the balance at the end of each month. This is the best way for all of us to use these cards, because you get the convenience of being able to make purchases without cash, yet you do not have to pay interest to the credit card company. However, this is not a perfect world and most of us end up using the cards and only paying the minimum balance due. This is exactly what the companies’ want, because this is how they make their money. The first thing you should look for in a credit card is the APR or Annual Percentage Rate. This is the rate that the company will charge you for the use of their money. Obviously, you want to find a card with the lowest rate, somewhere below 15% would be reasonable. The better your credit score, the lower the rate you will be offered. You should also be aware that many companies will offer an introductory rate, which can last anywhere from six months to a year. After this rate expires, you will then be bumped-up to the regular rate. With regards to the APR, you must also read the fine print and discover what the penalties are for Late Payments. If a payment is late, the company may have the option of cancelling the introductory rate and raising the standard rate to as much as 24%, if not higher.

The next item to consider is whether or not you want to pay the company even more for the privilege of using their card, which comes in the form of an annual fee. Since I feel that I am already paying them enough through their interest rate, I would suggest you try and find a credit card with no annual fee. If you have a decent credit score, you should not have a problem finding such a card. If your current credit card company charges you an annual fee, I would suggest negotiating with them to drop the fee. If they don’t, drop them and find another company (If you have a long-standing relationship with the company, this may hurt your credit score).

If you are looking to consolidate your debt from many high-interest rate cards to one lower-rate card, than you will want to find a company that offers 0% balance transfers. Finding such a card can literally save you hundreds of dollars in fees. Just be sure that you will be able to make the monthly payments on your new card, because even one late payment can see your wonderfully-low rate skyrocket to over 21% (or more). If you are looking into debt consolidation and you are a homeowner, another option to consider is a home equity loan. Because these are secured loans, they are often offered at lower rates; however, these loans are secured with your house, so be very careful when considering them.

As you decide on your new card company, please be sure and read the fine print in the contracts. Yes, it is tedious, but it can save you much heartache later. I have tried to cover a few of the points you should look at when choosing a credit card company. If you come across something that you need assistance with or clarification on, please let me know and I will try my best to help you. One final thing to remember: although credit can be your best friend, if not treated properly and with respect, it can turn into your worst enemy.

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