Choosing the Right Credit Card

When it comes to choosing the right credit card there are several things to keep in mind. What are your using your card for? How will you manage your debt? What fine print details should be paid special attention? Owning a credit card is a big responsibility and just like other financial matters there should be a plan in place to mitigate all of the risks associated with it.

What Will You Use Your Credit Card For?

The type of credit card you carry should be determined, in large part, by what you need it for. If your intent is to transfer an existing balance to a credit card with a lower APR then it's a good idea to find a balance transfer credit card with a low APR. On the other hand, if you're looking for a card to use for new purchases you'd probably be better off with a rewards credit card that offers cash back, airline miles or retail rewards. If you're using a credit card to establish or improve credit it might be a good idea to start out with a prepaid or secured credit card then move to an unsecured credit card in 6 months to a year. Whichever type of credit card you decide to carry make sure it's in line with your financial objectives.

How Will You Manage Your Credit Card Debt?

There are two basic types of credit card users: those who pay off their balance in full and those who don't. Before you choose a credit card you need to decide which category you fall in. If you're the type of credit card user that pays off their balance in full every month chances are you want a rewards credit card. The best rewards credit cards tend to have higher interest rates but that doesn't matter if the balance is paid in full, no interest will accrue anyways. If you're the type of credit card user that carries a balance from month to month then a rewards credit card won't do you much good (the interest you pay will outweigh any reward you receive). As a balance carrier you are much better off with a card that has as low an APR as possible. This will help in keeping up with payments and the interest that accrues.

What to Look for in the Fine Print

You've probably heard it a million times. "Read the fine print." It's true, always read the fine print. However, knowing what you're reading (or looking for) is also important.

First, look at the APR section of the credit card agreement. You're looking for the terms "Standard APR", "Balance Transfer APR", "Cash Advance APR" and Default APR.

The "Standard APR" is the APR that will be assessed if you carry a balance. This can either be fixed or variable. If you're the type of credit card user to carry a balance you're going to want to find a low, fixed standard APR.

The "Balance Transfer APR" refers to the interest you're going to pay when you transfer a balance from another credit card. If you decided that you are applying for a credit card to transfer a balance then you want this APR to be as low as possible. Otherwise, it's not as important as other credit card features.

The "Cash Advance APR" is the interest you are going to pay if you withdraw cash from your credit card. This APR is usually very high and is assessed immediately (there is no grace period for cash withdrawals from a credit card). Thus, it's never a good idea to take cash out of a credit card.

The "Default APR" is what your "Standard APR" changes to if you make late payments or go over your credit limit. This is usually very high. If you're the type of credit card user that is irresponsible with making payments then it's probably a good idea to not get a credit card.

Second, you'll want to look at the grace period. Twenty five days is standard but it's a good idea to know how long you have to pay off your balance each month before interest is assessed.

Last, you'll need to know what types of fees your credit card charges for the various services it provides. These include "Annual Fees", "Minimum Finance Charges", "Balance Transfer Fees", "Cash Advance Fees", "Late Fees" and "Overlimit Fees."

An "Annual Fee" is usually charged by credit cards that have top rewards like airline miles, hotel stays or vacation packages of some sort. It's important to know how much you'll be paying in annual fees because this is charged even if you don't use the credit card.

A "Minimum Finance Charge" seems like it should be considered interest but it's a flat fee. It's common for credit cards to assess a minimum finance charge of $0.50. This means that you'll pay at least $0.50 in interest. If the interest you owe is more than $0.50 then you'll pay that amount and the $0.50 becomes moot.

A "Balance Transfer Fee" is what is charged when you transfer a balance. This is in addition to the "Balance Transfer APR" so it's important to know this if you're planning on transferring a balance. Often, credit card companies will advertise a 0% balance transfer APR but charge a high fee. Always know the dollar amount you are going to be paying for transferring a balance and make sure that it makes financial sense.

A "Cash Advance Fee" is a fee you pay for withdrawing cash from your credit card. This is usually high and paid in addition to the "Cash Advance APR." Withdrawing cash from a credit card is very expensive and should be avoided all together.

A "Late Fee" is just that, a fee that is assessed when you make a late payment. This is in addition to the "Default APR" that is added to your balance. Thus, it's very important to always pay your credit card bill on time.

An "Over Limit Fee" is a fee that you must pay when your credit card exceeds its limit. This is in addition to the "Default APR" as well. Therefore, it's just as important to keep your credit card within the credit limit as it is to make payments on time.

In conclusion, to choose the right credit card it's important to know your financial objectives, the type of credit card user you are and any scenarios that can be forecasted in relation to details on the credit card agreement (defaults, balance transfers, etc.).