So you’re shopping around for a new credit card. But before you go further, let’s just remind ourselves: Credit cards can be great, but they have also been shown to induce people to spend more than they do with debit cards and more than they do with cash. The best way to use a card, bar none, is to pay it off in full and on time every month. If you can do that, you never have to worry about interest. And if you can’t? Then try to make sure you’ve got a plan for eliminating whatever debt you’re taking on in months rather than years. Here’s a guide to different cards for different purposes.
Card For A Big Purchase
You know you’re going to be buying a new refrigerator or re-carpeting the house. These aren’t purchases you’ll be able to pay off in a single month — or even two. What’s the best card for you? One with a low interest rate and no annual fee. The goal isn’t to rack up points or rewards, it’s to pay off a big purchase without adding hundreds of dollars to the cost of that purchase in interest. Right now, the average credit card interest rate is 19% for new cards and 14% for people who already have a card with that issuer. You want to shoot for lower than that.
Balance Transfer Cards
The other way to pay for that new fridge is to charge it on an existing card then move the charge to what’s called a balance transfer card. This allows you to shift high-interest debt from one card onto another card with a lower interest rate, thus helping you ditch your debt faster, since your payments will all go towards principal balance, not interest charges. Just note, you’ll need a very good credit score — in the range of 675 or up — to qualify. But you’ve got to be very disciplined with balance transfers. Remember: it’s a balance transfer, not a balance elimination. “If your problem is overspending, transferring to a 0% offer can give you a false sense of security, and if the spending doesn’t stop, it can lead to more problems,” says Curtis Arnold, the founder of BestPrepaidDebitCards.com.
Also, keep in mind that with a balance transfer, you often have to pay an upfront fee of 3% to 5% for the transfer. Do the math to make sure you’ll save enough to be worth it. And make sure you read the fine print — some balance transfer cards specify that if you don’t pay off your debt in a specified amount of time, you could end up paying retroactive interest. One way to keep yourself in check with these cards — don’t use it for new purchases excepting the big one you’re planning on.
If you have good credit — also in the range of 675 or up, rewards credit cards may be right for you. But remember, like any other credit card, a rewards card is good only for someone who pays off their balance on time and in full each month. If not, the interest rate on your balance is going to far outweigh any rewards you’d get.
If you do meet that criteria, the next question is: what type of rewards do I want? If you travel frequently, or are especially loyal to a particular airline, consider a travel card that gives you points or miles. If you’re not loyal to one airline, consider a travel card that’s more agnostic — allowing you to use your points on a variety of airlines and hotels. And, if you’re not sure you’ll redeem at all (and many people call into this trap) then opt for a card that gives you a percentage of cash back on every dollar that you spend. Cash can be used anywhere. Reaping rewards can be and feel great. But Arnold reminds us that rewards cards are designed to make us spend more — so if you have a penchant for overspending, be weary.
Finally, if you have no credit, bad credit, or limited credit, secured credit cards can help you establish and re-establish credit. With a secured card, you put down a deposit, and that amount becomes your credit limit. Deposit minimums differ according to the bank you use; it could be $200 or it could be closer to $1,000. And depending on your circumstances, it might be difficult to come up with that amount, which is one of the drawbacks of secured cards, explains Arnold. But if you can swing it, it’s often a good idea. “Usually if you use a secured card for 6 months to a year, your scores go up, and seeing that improvement is motivating,” he says. Many users may see their scores up 50 points in one year. Just note, secured cards can only help your score if the card issuer reports your on-time payment activity to the major credit bureaus, so that your good behavior works in your favor. Ask the lender before you apply for a card whether they will report on your behalf.
Once you know what type of card you want try to examine all the different cards within that category. There are a number of card comparison sites on the web that can help with this: they’ll outline key features of the cards and allow you to compare them side-by-side. Don’t just look at one site, look at several. “Be aware that 95% of sites out there only list cards that advertise with them. You’re getting a very small slice of the overall credit card pie.” notes Arnold. There are a lot of offers out there and it pays (literally) to do your research. Compare these with the cards that are offered by your credit union or bank. And in every case, look at the terms and conditions of each of the cards. The fine print is always important.
Adapted from an article distributed in partnership with SavvyMoney with reporting by Molly Povich and Jean Chatzky