How to Select a Credit Card

INTRODUCTION:

With the large number of credit cards available today, finding the best credit card can be an intimidating task. In addition to the large number of credit cards available, each type comes with its own unique terminology and characteristics. At Managing Money, we want you to have a good working knowledge of credit card basics to assist you in choosing the best credit cards. Below is a six step process to guide you in selecting the right cards for you.

STEP ONE:

Define your objectives. Ask yourself, why are you looking for a credit card? There may be many different reasons for wanting a new credit card. Perhaps you want to lower an interest rate on an existing card, are trying to build or repair your credit history, or need to keep your business expenses separate from your personal expenses. If you already have credit cards and are looking to improve by switching, use our Credit Card Consolidation Calculator. Before you can make a good decision on a specific card, you need to understand the different types of cards and their specific uses.

STEP TWO:

Know the different types of cards. Although some references may use slightly different terminology, generally speaking credit cards are separated into seven categories as follows:

• Regular Credit Cards: These are the traditional credit cards. They give you a specific credit limit based on your financial history and then charge you an annual percentage rate on your outstanding balance.
  
  
• Charge Cards: These cards require you to pay your balance in full each month, as opposed to paying off the debt over a period of time.
  
  
• Rewards Cards: A Regular Card with "bells and whistles". As an incentive to use the card, you are provided certain rewards depending on how much you charge. These rewards can range from a cash rebate to air travel rewards or benefits at particular retailers. There are many variations and combinations available.
  
  
• Business Cards: For business owners and sometimes employees. These are good if you need to separate business from personal expenses. They are basically a Regular card but may also have Rewards features.
  
  
• Poor Credit: A regular card designed for people with a poor credit history. May have a lower credit limit and assorted special fees. Look for cards that report regularly to the major U.S. credit bureaus so you can develop an improved history profile.
  
  
• Pre-Paid: Mainly designed for young adults, these credit cards differ from a Regular Charge card in that you deposit money up front and this becomes your credit limit. As you deposit or "reload" the card, you can continue to charge. These credit cards are actually more like a debit card and may have various assorted fees associated with them.
  
  
• Secured: Somewhat similar to Pre-Paid credit cards, Secured credit cards are designed for building credit. They require a security deposit that ranges from 50-100% of the credit limit and are often provided to cardholders by a bank prior to providing an unsecured, "Regular" credit card.
  
  
• Catalog: Designed for those with bad credit who are looking to rebuild their credit, Catalog credit cards can only be used for purchases from specific catalogs and/or websites. They have easier approval requirements, often times not requiring credit checks or employment verifications.
  
  
• Student Cards: For college students who have no credit history. Works like a Regular credit card but usually have lower limits. They may also have rewards cards characteristics with unique rewards such as discount shopping at "trendy" stores, music and movie discounts, and even theme park admissions.

STEP THREE:

Know the terms of your current cards. If you already own credit cards, take a look at the details to see if you can improve in any of the following areas. What is the Annual Percentage Rate (APR) on purchases and cash advances? Is there an annual fee? Is there a grace period? What is the balance method used for calculating the finance charge? Are there rewards? Get all the details, then start comparing your existing cards to the alternatives.

STEP FOUR:

Understand some important concepts and terms. Understanding some of the more important concepts makes finding the best credit card easier. Although this is not a complete list of credit card terminology, the list below will help give you a solid foundation for understanding the most important credit card concepts.

• Annual Fee: The membership fee charged to the cardholder per year. High annual fees are usually found with airline reward cards and credit cards designed for those with limited or poor credit.
  
  
• Applied Toward: The introductory rate may be "applied toward" purchases, balance transfers, and/or cash advances. Not all introductory rates apply toward all types of cardholder transactions.
  
  
• APR Cash Advances: The APR Cash Advances represents the standard Annual Percentage Rate for cash advances taken out on the credit card and the amount one will pay in interest for carried balances which originated from cash advances. This rate may be variable or fixed. If the rate is variable, it may be tied to the Prime Rate, and is usually adjusted on a monthly or quarterly basis. Transaction fees may also apply for each cash advance authorized.
  
  
• APR Purchases: The APR Purchases represent the standard Annual Percentage Rate for purchases; the amount one will pay in interest for carried balances from purchases made on the credit card. This rate may be variable or fixed. If the rate is variable, it may be tied to the Prime Rate, and is usually adjusted on a monthly or quarterly basis.
  
  
• Balance Transfer: When you move the balance from one credit card to a different credit card, usually to obtain a lower Annual Percentage Rate (APR). If you already have credit cards and are looking to improve by doing a balance transfer, use our Credit Card Consolidation Calculator.
  
  
• Billing Cycle: The time between your billing statements.
  
  
• Credit Limit: The total amount of money you are allowed to charge or hold as a balance on your credit card.
  
  
• Finance Configuration: The method in which credit card issuers compute the balance for purchases, balance transfers, and/or cash advances, before applying finance charges. This applies to all APR's. There are four primary balance computation methods for the finance charge. They are:
  
  
1. Average Daily Balance. This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the "average daily balance.
   
   
2. Adjusted Balance. This is usually the most advantageous method for cardholders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren't included. This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount. Some creditors exclude prior, unpaid finance charges from the previous balance.
   
   
3. Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits, and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges.
   
   
4. Two-cycle Balances. Issuers sometimes use various methods to calculate your balance that make use of your last two month's account activity. Read your agreement carefully to find out if your issuer uses this approach and, if so, what specific two-cycle method is used.
   
   
• Fixed Rate APR: A fixed APR that stays the same for the calendar year.
  
  
• Grace Period: The number of days in which a credit card bill can be paid in full without incurring finance charges.
  
  
• Intro APR (or Introductory Rate): The Annual Percentage Rate applied for a limited period of time for new applicants only. The introductory rate varies among card issuers, as well as the amount of time the rate is available for, and on what type of transactions the rate is applicable toward.
  
  
• Time Period: The amount of time in which the introductory rate is valid for new applicants. The time period usually begins once the cardholder is approved or authorizes a balance transfer.
  
  
• Variable Rate APR: An APR that changes throughout the year. Generally it is tied to another rate, such as the prime rate.

STEP FIVE:

Choose a card. Now that you are an expert on the different types of cards and the important terms and concepts, you are ready to find the best credit card. As a general rule, how often you pay your bills will have a major influence on the type of card you may want to choose. For example, if you anticipate paying your balance in full each month, you will likely be better served with a Rewards Card or a Charge Card. If you anticipate carrying a balance each month, consider a Regular Card with a low APR. If your credit history is a little "bruised", consider a Poor Credit Credit Card. If your credit history is truly poor, consider starting with a Prepaid Credit Card. Business owners should consider a Business card and students desiring to build a credit history should consider a Student Card. At ManagingMoney.com's Loans and Credit Center we make the selection process easier by including a "Card Rating" system. This system is based on all of the card features, and how each specific card relates to other cards in the same category. For example a rating of five stars is best, three stars is average and less than three stars is below average. Above average-rated cards offer numerous benefits and services at a low cost to the cardholder.

STEP SIX:

Manage your credit card. Your responsibilities do not end after you select you card. Pay your bill on time. Eliminate credit card debt as soon as possible. Hold on to receipts to reconcile charges after your bill has arrived. Protect your cards to prevent abuse and draw a line through blank spaces on charge slips so nothing else can be written in. Keep a record of your account numbers in a separate place and report a missing card promptly. Finally, use credit responsibly for a more secure financial future. Good luck in finding "the best credit card" for you!

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