Whether you’re a sensible card user or a bit dysfunctional when it comes to credit cards, there are steps you can take to get the right card and reduce your costs. Here’s what you need to know, from Get a Financial Life by Beth Kobliner.
Many of us have become addicted to credit cards, and banks have been more than willing to feed this habit by dangling cards in front of everyone old enough to sign his or her name. Today, the card companies are tightening their standards and limiting credit lines as well as hiking interest rates and fees.
Whether you’re a sensible card user or a bit dysfunctional when it comes to credit cards, there are steps you can take to get the right card and reduce your costs. It’s especially important that you know what to do these days; making credit mistakes can cost you a lot of money.
How to Find the Best Card for You
Despite what the ads say, whether your card has a Visa seal or a MasterCard logo is not that important. These are just membership organizations. It’s the banks or company that issues the card — such as Citibank or Bank of America — that matters. Issuers control the rates, fees, and other factors that are critical to you.
Look for a credit card that best suits your own personal spending habits. If you usually carry a balance from month to month, get the lowest interest rate — technically the annual percentage rate or APR — you can. But if you always pay off your balance in full, the rate doesn’t matter. In that case, your priority is to find a card that doesn’t’ charge an annual fee and offers a grace period, the stretch of time lenders give you to pay in full before they start charging interest.
If you pay off your entire balance each month, you may also want to consider special “reward” cards that offer frequent-flyer mileage or credits toward a car for every dollar you charge. If you have a troubled credit history, consider a secured card that requires you have enough money on deposit to cover your charges, and if you have a tough time controlling your credit card spending, you may be better off just sticking with a debit card instead. (More on all these options follows.)
In any case, most of us don’t need more than two credit cards total. Extra cards just make it easy to overspend.
How to Search for a Low-Rate Card
If you find you don’t have enough cash to pay off your credit card balance immediately, you’ll want to get the lowest-rate card possible and transfer your debit to it. The way it generally works is that the new low-rate issuer pays off your other creditor(s) or gives you checks to settle your old accounts. The details vary from card to card, though, so you need to read the fine print (online, generally buried in the “terms and fees” page or in the paperwork the company sends you) before signing up. Some low-rate issuers, for example, offer you a twenty-day grace period before interest acuminates on the money you borrow; others tack on transfers fees (for transferring the debt, naturally) and start charging you interest the moment the checks are cashed by your old cardholders.
There are two kinds of low-rate cards: those with low rates that last and those with temporarily low introductory rates, also known as teasers. Teaser rates can be as low as 0% and last for six months to a year. After that period, the rate increases dramatically. While the low teaser rate lasts, however, it can save you a lot of money. Transferring a $2,000 balance from a 16% card to one with a 0% teaser rate, for example, would save you $156 in interest payments over six months – assuming there are no balance transfer fees, of course.
So if you know for sure that you can pay off the whole card before that teaser rate runs out, you’re okay. The card issuer counts on the fact that you can’t – which is the case for most people. If that’s your situation and you’re super-organized, you may be able to keep your rates low by going “credit card surfing” – transferring your balance to a new teaser-rate card whenever your teaser rate runs out. But you have to surf carefully and that’s very hard to do. Credit card companies have gotten wise to credit card surfers, and most now charge transfer fees, so pay attention. Also, don’t let the low rates seduce you into paying off your debt slowly; try to pay at least as much every month as you would with a higher-rate card.
In a perfect world, you’d be able to find a card with a low rate that lasts. The interests rates on such cards tend to be higher than teaser rates, but are far more stable in the long run. Unfortunately, after the wave of credit card delinquencies in recent years, banks have made it significantly more difficult to qualify for these cards. Here are details on some of the requirements.
- Solid bill-paying habits. If you’ve been 30 days late paying a credit card bill within the last four years or if you have ever been more than 60 days late, you’ll have a hard time getting a low-rate card.
- Stability. Some issuers want to see that you’ve been at your job for at least a year. It also helps if you’ve lived in the same apartment or house for a year.
- Moderate usage. To measure credit card use, issuers look at the ratio of your outstanding debt to your potential debt (that’s the sum of the credit limits on all your cards). This is called your usage ratio. For example, if you have two cards with a combined $1,000 credit limit and outstanding debt of $900, your usage ratio is 90% ($900 divided by $1000). This ratio should not exceed 30%. Borrowers who qualify for the best cards have a ratio of about 7%.
- Long-term dependability. Lenders favor borrowers who have established a lengthy track record of on-time payment – years and years of good behavior.
ABOUT THE AUTHOR
Beth Kobliner, the author of Get a Financial Life (Copyright © 1996, 2000, 2009 by Beth Kobliner), is a contributor to the New York Times, and a former staff writer for Money magazine and a financial columnist for Glamour. She’s made multiple appearances on Oprah, Today, CNN, MSNBC, PBS, and NPR as a personal finance expert.
MORE ARTICLES BY THE AUTHOR
- Read Chapter 1 of Get a Financial Life
- See the book’s Table of Contents
- Learn more about Get a Financial Life
- Read “What Your Wallet Can Learn From Your Dentist,” an exclusive essay by Beth Kobliner