Choosing the Right Credit Card Wisely

Every adult has a valid reason to secure and utilize wisely a credit card. Sometimes it seems difficult to sort through the offers to find the right card for your use. Vendors are so aggressive for this section of the financial marketplace, it is not unusual to receive many unsolicited offers weekly in your mail box. There are several different types of cards, and many purveyors in the marketplace seeking your business.

Selecting your card and your institution is an easier process with an evaluation checklist:

What features do I require? What are the qualifications to obtain the card? What are the costs? What benefits are being promoted? What benefits am I actually likely to utilize? And importantly, "If I utilize this new replacement card exactly as I utilize my current card(s) what are the costs?" Assuming you will change your credit practices because you change cards is an unlikely scenario.

The major costs associated with credit card use are:

The interest rate
The default interest rate
The annual fee
The processing fees
The late payment fees
The over the limit fees
Payment processing fees.

Other questions arise. When do interest charges begin to accumulate? What is the length of the grace period? How is the interest charge calculated? On the average daily balance?

Promotions to get your business often include low interest or no interest assessments on balance transfers for a period of time. When do you begin paying interest on these transfers and at what rate? What is the rate associated with other current charges? Is it a different rate than my balance transfer rate?

Are there benefits to the use of the card? A number of credit cards now have rewards tied to their use. Sometimes the rewards are logged in as cash back incentives, frequent flier mileage, or prize coupons that may be utilized to acquire merchandise. As a rule of thumb, these type of cards normally have some type of annual membership dues, and often, not always, extract a higher interest rate. There are big promotions now for the use of certain cards sponsored by gasoline purveyors that give you so much back on every gallon of gasoline. It is important to actually weigh the benefits against the extra cost. Your credit union or local bank may offer a no annual fee card with 14% interest on unpaid balances, and you are looking at a card with a $60 annual fee, and 16% interest, but it gives you frequent flier miles. Can your annual spending on this alternative rewards card actually procure enough miles to make the higher cost reasonable? As we all know, there is no such thing as a "free lunch" when if comes to financial instruments. Do the benefits, in your case, actually outweigh the additional costs associated with the rewards type card?

The primary value in a credit card is the portable replacement of cash, the extraordinary purchase credit line ( a quasi-emergency fund), and as a great record tracking device for allowing an individual to know exactly where his or her money went through the month. A credit card is not a raise in pay, allowing you to buy what your paycheck will not let you afford. If you cannot afford the purchase, you will find that you certainly cannot afford the purchase with 18% interest tacked on!

Watch those late fees and over-limit fees!
It is possible, for a person that exceeds his limit, and is one day late on a payment to pay a combined fees and annualized interest rate of over 50%. Assume a person has a three hundred dollar credit line, and goes over his balance with that last tank of gas by six dollars. He might be accessed an over limit fee of $25. If his payment arrives one day late, he might be assessed a $35 late payment fee. And because he is both over limit, and late on his payment, his default interest rate he signed up for in the small print, now goes to 28%. So on a $300 obligation, he has fees of $60, and interest of 2plus% per month.

Before you transfer your balances, or apply for a card, prepare your list of questions about the costs, features and benefits offered by the company seeking your business. Look at your real need for credit. Will you pay off your balances each month? And know one more thing. When you apply for a credit card, or multiple credit cards, you are normally lowering your current credit score by a few points just by the activity related to your management of your "plastic" access.

Adapted from the I Must Prosper Tutorial
Donald Clark, Chrysalis Consulting, Inc.

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