CHAPTER
5

Finding the Best Credit Cards

In This Chapter

  • Finding the card right for you
  • Getting a low- or no-fee card
  • Watching out for unwanted fees
  • Understanding credit card interest rates
  • Paying your balance

More than 1 billion credit cards of every kind are in circulation in the United States, with more than 75 percent of all Americans holding at least one. Credit cards come in all flavors, with some offering far better rates and user advantages than others. Although credit cards are convenient and necessary for building a credit history, they have been the downfall of many who overspend and find themselves unable to pay their credit card bills.

In this chapter, we look at how to get the card (or cards) that make the most sense for you, ways to avoid the fee trap, and how to be sure you can pay off your monthly balance.

The Invention of Credit Cards

Although the idea of buying on credit had been around for a while, credit cards really got their start during the 1960s, at the tail end of the great baby boom. Bank of America introduced the first bank credit card, BankAmericard, in 1966, and consumers liked the concept. Americans were soon charging up a storm, and a new and vibrant industry was underway. After the baby boomer market had been saturated, credit card companies began targeting young people during the 1980s, trying to get them signed up for cards. Many have opinions about what the best age is for someone to get that first card, but even high school students who have just turned 18 are, in many cases, able to obtain a credit card.

Unlike now, however, in the early days of credit cards, nearly everyone paid off their balances each month. It was considered almost a disgrace to owe on a credit card. Cards were fun and convenient, but the balance on them was rarely carried over. Somewhere along the line, the stigma of owing money on credit cards lessened and eventually disappeared. Today, it’s estimated that about 44 percent of American households that have credit cards hold balances.

Getting a Card

Chances are, one of these days you’ll need to get a credit card, if you haven’t already. And you probably should have one. Credit cards often are necessary, as mentioned earlier. Some banks won’t even let you open an account if you don’t have a credit card, and, as you learned in Chapter 4, it’s important that you acquire credit in your name for use later on.

If you don’t have a card, you can find applications at your local bank, if you use one. Or you can apply online for a card from a bank such as one of these:

If you’re looking for a card, a site like NerdWallet (nerdwallet.com) or CreditCards.com (creditcards.com) can help you search for and find the card that best fits your needs. Criteria for “best card” varies depending on your circumstances, and these sites provide good information about fees, interest rates, and the like.

Normally, if you have no credit history but are at least 18 years old with a job and steady income, you’ll be able to get a card with a limited credit amount, usually $500 to $1,000. Your chances of getting a credit card increase if you apply for a card through a bank with which you have an account. If you don’t have a job, but you have a parent who is willing to be a cosigner or guarantor (see the next section), you can still get a credit card.

Money Pit

We know people who will spend hours, even days, shopping around for bargains. They’ll never buy anything that’s not on sale, yet they’ll let their credit card debt accumulate and pay 13, 15, 18, or an even higher percent interest on it. Even if they find a bargain purchase, they’ll still lose money by having to pay those high interest rates on their credit cards.

If you’re diligent with your payments, you’ll probably be able to have your credit limit upped after 6 to 12 months. The amount of the increase depends on your income or your ability to repay the line of credit.

Cosigners and Secured Cards

If you have no credit history and your earnings are low, or if you already have a bad credit history, you might not be able to get a card in your name alone. You might need to apply for a secured card or get someone to act as a cosigner. A cosigner, or a guarantor, is someone who agrees to assume responsibility if you can’t, or don’t, pay off your credit card debt.

If you need a guarantor to get a credit card, the person must be an adult with a good credit history. Usually, a parent takes this role, although it could be someone else, depending on the circumstances. Both you and the other person whose name appears on the card account are responsible for missed payments and overspending.

A secured card or credit account requires a deposit that serves as collateral. The deposit is equal to the amount of credit allowed on the card. For example, if you got a card with a $500 credit limit, you’d have to make a $500 deposit so the bank already has your money if you default on your debt. Other fees often are charged to open a secured account, although as more companies begin to offer these types of cards, some are dropping the fees to get an edge on the competition. Most do have an annual fee.

Some companies pay you a bit of interest on your deposit, but don’t expect it to be very high. You, on the other hand, will pay up to 20 percent interest on unpaid balances because your credit risk is considered higher than someone’s with a regular card. But if you want a card and want to begin a credit history, a secured card might be the way you’ll need to go. If you have an account with a bank or credit union, that’s a good place to start your search.

If you do get a secured card, be sure you find out when your account can be converted to a standard account. At that point, you should get your full deposit back, provided you’ve made timely payments and don’t owe any money on your credit card.

Here are some secured cards with good reputations:

A big word of warning here: be very wary of companies that offer credit cards, either secured or unsecured, at fabulous rates or to people who haven’t been able to get a card. A rapidly growing number of unscrupulous companies are targeting people with poor or nonexistent credit ratings who can’t get approved for credit cards through traditional issuers. The internet is full of offers for people who previously couldn’t get cards. Some of these offers are pretty unbelievable and should be avoided.

Money Pit

The old saying, “If it sounds too good to be true, it probably is,” definitely applies to credit card ads. You can get yourself into a lot of trouble if you make the mistake of dealing with a disreputable company. Many of the cards have “initial balances” (really substantial fees) on which you pay interest with very minimal monthly payments.

How Many Cards Should You Have?

After you get one credit card, it’s easier to get more. In fact, you might find that you’ll be getting offers from a number of credit card companies that would be happy to have your business. And some people do want and need a variety of cards, perhaps using one for business, one for personal expenses, one for internet purchases, etc. Unless there’s a good reason that you need more than one or two credit cards, however, resist the temptation to open more, no matter how appealing the reward offers or rates might seem.

There’s no reason to have a separate card for every department store, gas station, and electronics store in town. Having multiple cards in your wallet merely encourages you to use them and run up more debt. Nearly all retailers that accept credit cards take Visa and MasterCard. It’s a lot easier to keep track of one credit limit (or two, if you really feel you need a backup) than a dozen cards from all over the place.

Types of Cards

You’re likely to see many different kinds of credit cards. Let’s look at some of the distinctions so you know what’s what.

Charge Cards

These aren’t really credit cards because you’re required to pay off your balance at the end of each billing period. Charge cards are good because you have no interest charges, but they may come with an annual fee, and if you charge more than you can pay all at once when the bill comes, you’ll be assessed a late fee.

Fixed-Rate Cards

These credit cards have a fixed interest rate, which is more comfortable for some people than a variable rate.

You should be aware, however, that all fixed-rate cards reserve the right to raise their rates from time to time, often with as little as a 15-day written notice. Rates on a fixed card won’t vary as much as those on a variable-rate card, but they do fluctuate from time to time.

Variable-Rate Cards

The interest rate on these cards changes periodically based on the rate charged by the lending institution holding the card. The card is tied to an index—normally the Prime Rate. When the Prime Rate is raised, the interest rate on the card rises as well.

Dollars and Sense

If you have or get a variable-rate card, keep a close eye on your statements and any information you get from the credit card company so you’re aware of when the rate changes.

Elite Cards

These status cards, often called Gold, Titanium, or Black cards, offer some advantages such as buyer protection plans or cash back after you spend a certain (high) amount. They also can offer perks like emergency roadside service, airport club access, hard-to-get reservations in popular restaurants, and insurance on newly purchased merchandise. These cards often have high credit limits, but they usually carry high annual fees.

Elite cards generally are available only to people with established credit reports and high credit scores.

Rewards Cards

An increasing number of credit card companies are offering rewards cards that give you something back. You might get cash back (as with a Discover Card), airline miles, a rebate on gas, rental car or hotel discounts, discounted shopping at particular stores, and more. Credit card companies do this to be competitive.

The more you charge to the credit card, the bigger your reward. However, there’s usually a fee involved with getting one of these cards, so think carefully about whether it’s a worthwhile venture.

Dollars and Sense

Some people use rewards cards to pay for almost every single thing they buy—from college tuitions to groceries. If you decide to go this route, be sure you’re able to pay off your balance so you don’t end up paying interest fees and cancel out the benefits of your rewards.

The advantage of prepaid cards is that you never incur interest fees because you’ve already paid for your card purchases. Disadvantages, however, are that you often must pay a fee to set up an account and each time you “load” your card. And of course, you need to have money available to get a prepaid card.

Still, prepaid credit cards are useful for people who can’t get a traditional card or are working hard to avoid high credit card interest fees. A site such as CreditCards.com can help you learn more about these cards and how to apply for them.

Understanding Annual Fees

There are as many credit cards deals as there are cards, and if you’re going to be using one or more cards, it will be worth your while to shop around for the best deal you can find. Credit cards can cost you money, make no mistake about it. But there are ways to minimize those costs.

Intense competition among card companies has forced most of them to lower, or even drop, their annual fees. Only one in four credit cards came with an annual fee in 2015, and some credit card providers will waive the fee if you agree to make a certain number of purchases a month or other conditions.

Definition

An annual fee is a charge you pay to the bank or credit card company for the privilege of holding its card.

Annual fees vary tremendously, so be sure to pay attention to what you’re paying. CreditCards.com conducted a recent survey of 108 credit cards and found that 28 of them came with an annual fee. The median cost of the annual fee was $50, with fees ranging from $18 to $500 for a status card.

At your stage of life, it’s unlikely that there’s a good reason for you to have a status card, so you shouldn’t incur a high cost for an annual fee. Ideally, get a card that does not require a yearly payment.

If your credit record is good and you’re paying an annual fee on your credit card, it won’t hurt to request that the fee be waived. It’s better to ask and have your request denied than to be paying the fee unnecessarily.

Other Fees to Watch For

In addition to an annual fee, your credit card company probably has tacked on some additional costs. The average credit card comes with 6 fees, and some have as many as 12. Following are some other fees to look for on your own credit card, or when you’re checking out an offer for a card.

Late Fees

You’ll be charged a fee if your payment is late. That’s in addition to the interest charges you’ll incur for not paying off your balance by a specified time. Most but not all card companies charge a late fee, so be sure you find out when you apply for the card.

Cash Advance Fees

These are nasty fees, and because they are, you should try to never take a cash advance. When you borrow cash against your credit card, most cards forget about the grace period and start charging you interest right away.

About 50 percent of card companies charge you 2 to 6 percent more interest on a cash advance than on other charges not paid off by the end of the billing period. There’s also usually a one-time fee of between 2 and 5 percent for each cash advance.

Discretionary Fees

These fees, imposed on you to pay for things such as credit life insurance or a shopping service you never ordered, are at the discretion of the card company, not you.

Money Pit

Always read your bill carefully, and don’t pay for anything you didn’t order.

Account Reopening Fees

If you close your account and decide to reopen it, you could be charged for the privilege.

One-Time Processing Fees

These are fees you need to pay before you’re allowed to use your card. They’re not common, but some cards require you to pay nearly $100.

Be sure you read each bill carefully when you get it, and look for any charges you can’t account for. If you feel you’ve been charged for something you didn’t agree to in advance, by all means pick up the phone and talk with someone in customer service. The intense competition among credit card issuers is forcing them to be responsive to consumers’ needs and complaints. Be sure you take advantage of it!

Making Sense of Interest

Credit card companies make money when you have to pay interest on your account balance. If you pay off your balance every month, you don’t have to pay interest, which is a very good thing, especially if your interest rate is high. If you have a balance, however, you’ll be charged a certain percentage of interest on it.

Definition

Interest is the fee the bank charges you to use its money to finance what you buy with your credit card.

When you get a credit card, it will come with an APR, or annual percentage rate of interest. The average APR on credit card interest at the end of 2015 was about 15 percent, but some rates can be as high as 29 percent. That can mean some hefty fees if you carry a balance.

Let’s say you charge a new area rug for your living room for $300. The store where you got the rug collects its money from the bank that issued your credit card. The bank, in turn, gets its money back from you along with interest if you don’t pay back the $300 within a specified time. You usually have a grace period, or a certain amount of time to pay off your purchases before you start getting charged interest. Be sure you know what the grace period on your card is. Card companies aren’t required to provide a grace period, but nearly all do. The average grace period is about 21 days.

Even if you pay $200 of the $300 you owe for the rug, you still will be carrying a balance on your credit card bill. That wipes out your grace period, meaning you’ll be paying interest on the balance.

This can get to be an expensive problem if you owe $1,000 on your credit card and you make only the minimum payment each month. It could take you months, or even years, to pay off the money you owe, and you’ll end up paying nearly as much in interest as you owe on the loan. It’s a really bad idea to let the interest keep building up your credit card debt. That rug could end up costing more than twice the amount you paid for it if you pay it off $10 a month, plus interest.

If you don’t pay off your balance, your credit card provider is required to include information on your statement that tells you how long it will take to pay off your balance if you make only the minimum payment each month and how much more you’ll end up paying. Take a look at your next statement. You might be surprised to see how easy it can be for a $1,000 bill to balloon into a $1,850 bill. With an average credit card interest of 15 percent, not paying off your bill every month can get very expensive, very quickly.

Use a website such as NerdWallet or CreditCards.com to compare interest rates and other features of credit cards. When you find a card with a good rate, go ahead and apply. If you’ve had a card for a while and you’ve maintained a good credit record, you should qualify for a better rate. If you’ve only had a card for a short time, it might be harder to get approved for a low interest rate. Still, it can’t hurt to try. There’s a lot of competition for cardholders, and some places are willing to give you a lower interest rate to keep your business. In some cases, all you have to do is ask.

If you haven’t had much time to build up a credit record, and you’re not approved for a lower interest rate, be diligent about keeping up with your payments, and try again in a year to get a better rate.

Paying Down Your Balance

If you pay off your credit card every month—which is the best way to do it—you won’t incur any interest charges. Then your credit card is simply a convenient alternative to paying with cash.

If you have credit card debt, you need to make a plan for paying it down. One way to do this is with a balance transfer. A balance transfer doesn’t mean you don’t have to pay back your credit card debt, but it can help you to do so faster.

To do a balance transfer, you open a new credit card with a low interest rate and move the balance from your current card or cards onto it. Basically, you’re paying off your old cards with the new one. Of course, you’ll need to be able to qualify for and get a card with a low interest rate for this to work.

Some balance transfer cards offer a 0 percent interest rate for a specific time period, such as 15 months. If you owe a lot on your credit card and can reduce your interest rate from 15 to 0 percent, you should be able to pay off your debt a lot faster, ideally within the window of the no-interest rate offer. You’ll be charged a balance transfer fee to move your balance onto the new card, but you still could end up saving a substantial amount of money. (Turn to Chapter 8 for more on balance transfers.)

Pocket Change

NerdWallet recently released its 2016 list of best balance transfer and 0 percent interest credit cards. You can find it at nerdwallet.com/blog/top-credit-cards/nerdwallets-best-balance-transfer-credit-cards.

If you can’t get a low or no-interest balance transfer card, you’ll need to figure out another way to pay down your debt. Think about possible sources of money. As difficult as it might be to go to a family member, confess your sins, and ask for a loan, it might be the healthiest thing for you to do, financially.

If you have any money in a savings account, break into it and use some to pay down your credit card debt. It’s a sure bet that you’re paying far more interest on your debt than you’re earning on your savings account.

You’ll learn a lot more about credit card debt in Chapter 6.

The Least You Need to Know

  • Credit cards are available in all types, so do some homework to determine what card makes the most sense for you.
  • If you’re paying high fees and interest rates on your credit cards, it’s time to look around for another, lower-rate card.
  • Interest rates on credit card debit can add up quickly, so be sure you understand how it works and stay on top of it.
  • Paying off your credit card bill in full and on time each month is the best way to go. If you can’t, consider getting a balance transfer card or coming up with money from another source.