Signs of Good and Bad Credit Cards

    Good and Bad Credit Cards Being Cut UpThe selection process for credit cards has become a lot like choosing a new car: it’s a beauty contest, with banks and card companies offering many attractive choices. In the process of trying to reach a conclusion, you may get confused.

    Do you like “2% back every month” more than “double-mileage” rewards? Would having a “zero-percent interest for 15 months” raise your eyebrows higher than a “50,000 bonus points” offer? How about “$150 Cash Bonus” versus “No annual and foreign transaction fees”?

    Welcome to the good — and sometimes bad — world of credit card offers. If you can’t make up your mind, join the crowd. Owning a credit card gives you great financial clout, however, credit card debt is the first step to financial disaster for many people. Be cautious and informed before signing up for a card.

    What to Look for in a Credit Card

    There is no such thing as a perfect credit card, but there are a lot of beautiful ones and some not-so-nice ones. You’ll need to look at a card’s basic features and fees as a starting point and go from there. Other areas to consider would be what you’re using the card for, what incentives impress you, what negatives can you avoid and, most importantly, what you can honestly afford every month.

    With that in mind, here are some factors to consider before signing up for the first card offer that floats into your mailbox.

    Spending Habits

    The first two things you should consider when choosing a credit card are how you’re going to use the card and how you’re going to pay for it.

    Some people use a credit card as a total replacement for cash and checks — nearly all their expenses go on the card. If you have the discipline and resources to pay it off every month, that is a great way to keep track of your budget. A card with a great rewards program would be ideal in this circumstance.

    On the other hand, if you are not disciplined about spending, or you don’t have a reliable income, you may not be able to pay off the balance every month. In that case, interest rates are applied to the unpaid balance. This can get very expensive, very fast. The solution would be a zero-interest or low-interest card. No rewards program can beat a 15–20% interest charge every month on unpaid balances.

    Applying for Credit Cards

    When you’re ready to apply for a credit card, check your credit score.

    Knowing your credit score will give you a good idea about whether or not it’s worth your time to apply for a card with rewards attached to it. Cards with rewards go to consumers with an excellent credit score (720 or higher), though you might get approved with a good credit score (690-719). If you have an average credit score (630-689) or less, you likely will have to settle for whatever card company will have you.

    With your credit score in hand, go to the website for the card company or bank that offers you the incentives or conditions that you are comfortable with.

    Ideally, you would apply for just one card. Credit scores are negatively affected every time a new application hits and since that is vital to approval, it’s best to keep applications to a bare minimum and avoid credit score fluctuations.

    Application forms will ask for standard personal information, your name, address and social security number. There may be more questions about your personal finances, such as employment, income, home ownership and debt level. It is extremely helpful to reduce your debt load as much as possible before applying.

    The card companies will verify your information with the three major credit bureaus, and use it to help them set the terms and conditions for your card.

    If you have a verifiable good score and credit history, you could be approved — even instantly. You could also be “pre-approved,” which is when the card company already has verified your credit history and score. This sort of application often comes online or in the mail.

    You also could be turned down, especially if you have a bad credit score and credit history. Don’t be discouraged. Credit card companies give you an opportunity to plead your case. Gather evidence of your financial responsibility and make a convincing argument. You might be surprised at what persistence will bring.

    Credit Limits

    The best cards will offer you a credit limit that fits your credit history and financial resources. It should be high enough to allow you to make purchases that belong in your financial bracket, but low enough that you don’t make a mistake that drowns you in debt.

    The rule of thumb is that if you demonstrate responsible use of the card for six months or longer by spending less than 30% of your limit and making on-time payments, most card companies will increase your credit limit automatically. If you continue to spend and make on-time payments every month, you can ask for bigger increases over time.

    Interest Rate and APR

    A credit card’s interest rate is called its annual percentage rate (APR). Your APR is based on your credit score and history. A good credit score and long credit history equals lower interest rate. Conversely, a low credit score and no credit history (or a short one) will mean a higher interest rate.

    If you are responding to an advertised offer, be sure to ask if the advertised APR is permanent or if it applies only to a limited introductory period. If the APR increases after a specific time period, ask what the permanent rate would be for comparison purposes.

    Balanced Computation Method

    If you know you will carry a balance from month-to-month, interest rates are important. Another thing to consider is the method used to calculate the interest charged. Most companies have a mathematical formula that looks like this: average daily balance x periodic daily interest rate x number of days in a billing cycle = finance charge.

    There should be between 24 and 31 days in a billing cycle. Any card company that computes the balance based on two billing cycles should be avoided. You will pay far more in finance charges when you are billed for two cycles.

    Annual Fees

    Some cards may come with an annual fee that you must pay just for being a cardholder. This fee is separate from a card’s APR and other charges. An annual fee, much like a membership fee, applies regardless of whether you use the card or how much you use it. It is typically in the range of $15–55. Most cards waive the annual fee for customers with good or excellent credit scores.

    Other Fees

    Take a look at other fees that apply to your card. That means reading the fine print in the contract that will spell out if you will be charged for things like late payments, foreign transactions, balance transfers and over-the-credit-limit fees. These fees can add a considerable amount to your monthly bill. If possible, avoid all of them.

    Grace Period

    This is the time between the closing date on a billing cycle and the date payment is due. By law, a credit card’s grace period must be at least 21 days. A grace period may be shorter for non-credit transactions like cash advances. Some credit cards also charge interest starting from the date of purchase if the bill is not paid in full before the end of the grace period.

    A good credit card has simple and consistent grace period rules, regardless of the type of transaction or date of payment. Be sure the grace period affords you enough time to make a payment, or reject that card.

    Customer Service Reputation

    The availability and reliability of a card company’s customer service — which adds to the company’s reputation — is a key element often overlooked when shopping for credit cards.

    J.D. Power, which conducts consumer satisfaction surveys on a number of subjects, does one every year for credit cards. The 2015 J.D. Power report says that Discover has the highest customer satisfaction among card issuers, just slightly ahead of American Express and Chase.

    A good credit card and its lending company should have a 24-hour toll-free customer service line. Look at online reviews to make sure current cardholders are happy with their service and treatment. Also, investigate identity theft protection. Credit cards are the top source for stealing someone’s identity.

    Rewards Programs

    According to a survey by Fidelity, more than half of cardholders use credit cards that include a rewards program. Cardholders with attached rewards programs favor cash back (63% of them) and points toward merchandise (47%) as their favorite rewards. Airline miles (39%) and gas, dining or other forms of rewards (39%) are also popular.

    The rewards are based on your spending, and can double or triple when you spend money in a specific category like travel, gas or groceries. The rewards and conditions for cashing in on them vary from card to card, so check several before deciding which set of rewards appeals to you.

    While 85% of households have at least one reward card, 25% of users never redeem their earned rewards. Avoid wasting your rewards program by shopping around for one that suits your credit card habits and needs. But weigh the rewards against the potential costs such as APR and fees. Choose a card that’s good for you even without the rewards.

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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