In a perfect world, we would all like to live debt free. Although that is the long-term goal for every Money Crashers reader, there may be times when you are forced to use a credit card. Picking a credit card does not have to be like going to the dentist for a root canal. You just need to know some basic information. While we don’t recommend that people go out and get a credit card to sustain their finances, we understand that some people prefer to use them as a way to organize their finances and pay for everything under one account without putting their checking account at risk. Today, we will take a look at exactly what you should look for when choosing a credit card.
1. Watch the interest rate.
It all starts with the interest rate. Ask yourself the following questions:
- What is the interest rate for the credit card?
- How long does this interest rate last?
- Is the interest rate fixed or variable?
Card companies often offer low introductory rates to attract new customers. These teaser rates often jump substantially after the introductory period is over. Introductory rates may only last for a few months to a year. Be sure that you are comfortable with the new interest rate when the introductory rate expires.
2. Take a look at the annual fees.
How much is the annual fee? Many credit customers forget to calculate their annual fee when figuring out how much interest they are repaying. Annual fees make it harder to repay your balance. Some cards have no annual fees and others have annual fees that can run hundreds of dollars. For example, the Visa Black Card has a $495 annual fee! That’s right. You will pay almost $500 in fees just for the privilege of carrying the card. No credit card is worth that amount of money.
3. Know your credit limit.
It’s important to know your personality when choosing a credit card. Are you a user or abuser of credit? If you get a card with a credit limit of $10,000, will you run out and charge it up right away? If so, you don’t need a credit card at all because it will get you in trouble. If you’re responsible with credit cards, then you’ll probably be using it to put all of your expenses, including fixed monthly bills, and paying it off at the end of the month, so you’ll need a limit high enough to accommodate those charges.
4. Read the fine print.
You need to read the fine print to know exactly what you are getting yourself into. Credit card companies hide the most relevant and important information in the tiniest font. Transaction fees, cutoff dates, default interest rates, cash advance fees, transfer information can all be found in the fine print. Slick credit card companies will often hide agreements that automatically enroll you in “credit protection services” in the fine print. You may never notice that you are enrolled in these services until they are charged to your bill. Reading the small print may seem time consuming, but it is worth it. So, break out your glasses and start reading!
5. Pick a card with a long grace period.
The grace period is the time between when you make a purchase and when you start accruing interest. How long is the grace period? Bad credit cards will start charging you interest from the moment that you make a purchase. These cards are hard to pay off because you are always accruing interest charges. The best credit cards will give you at least 21 days before they start charging you interest on your new purchases. The longer the grace period, the more money that you save.
Above all, make sure that a credit card will not tempt you into making purchases you wouldn’t otherwise make. Be disciplined, make the full payment every month to avoid any interest charges and build up a good credit score, and use it as you would cash. Credit cards are not free money!
(Photo credit: orphanjones)