One factor in a good credit score is the delicate balance between not using credit enough and using it too much.
How many times have you applied for or taken out a credit card based purely on its current interest rate or balance transfer option?
You may be surprised to note there are at least 7 elements worthy of consideration when you take out a new credit card. Of course, interest rate and balance transfer details are important. However, to judge a new credit card on just one or two options could easily result in a bad deal for you.
For the best credit results, you need to consider the following 7 options when you take out a credit card:
The Initial Concessionary Interest Rate and Period
Many credit cards offer a 0% interest rate on purchases for a limited period, usually six to nine months. This option can be very attractive when you are one of the millions of Americans who do not repay the balance in full each month.
After the initial period the rate reverts to the standard rate, however, usually in the 10 to 16% range, this can hurt. Especially if this rate is higher than the rate on the card from which you transferred from…
Some cards have no interest free offer but have a much lower permanent interest rate, from about 6.9% (although it will vary in line with general interest rate charges). If you are likely to have a long-term balance (if you are unable to pay off the debt within the first 6 to 9 months), this lower permanent interest rate option could save you money in the medium to long term. Keeping in mind, you will not be able to switch to this rate if you have taken the 0% initial rate offer.
A Monthly Interest Free Period on New Purchases
This relates to the period between your purchase of an item and when you will be charged interest on the amount of what you purchased. There are some cards that only start charging interest after the charge for the item appears on the credit card statement. This means you’ll get approximately 25 to 56 days of interest free credit on your purchases. Thus, if you pay the balance in that period, you’ll pay no interest.
Alternately, some cards will charge interest immediately from the date of purchase and are therefore, not a great idea if you clear your balance each month.
The Annual Fee
Many cards have now implemented an annual fee. This fee is due by you whether you clear the debt each month or if you roll over your debt. If you can find a card with a low or no annual fee, this is something you might want to consider along with other factors.
0% Balance Transfers
When taking out a new credit card you will normally have the option of transferring an outstanding balance (or outstanding balances from many other cards) to your new card with no interest charged for a specified period.
Generally, this is marketed as a “0% balance transfer.” But really, that’s not usually the case. Many of these cards have a 2-3% “administration charge” for transfers and/or the 0% is only a set time offer.
The availability of true 0% balance transfers is disappearing, and in all likelihood, it will completely disappear sometime soon. If a 0% balance transfer is important to you, then you might want to take advantage of this soon. Just do be aware that for other purchases and maybe even for the transferred balances after the intro period, the long-term interest rate might be higher than with other cards considered.
The Availability of Cash back
Many cards now offer cash back on purchases. This is usually is between 1/2 and 1% of new purchases (excluding balance transfers and cash withdrawals). If you do not repay your account in full each month, this might be a factor to take into account for your decision.
The Rewards and Discounts Offered with Your Credit Card
Rewards exist when a card allows you to purchase goods or services at a discount by using your credit card OR you get some perk or benefit free – such as insurance on purchases – when using the card.
Do just remember… In the credit card business, nothing is free. If there are rewards offered, the cost will be built-in somewhere (usually a higher interest charge).
Credit Card Payment Insurance
Whether you take this option or not, most cards now offer some sort of payment protection insurance in the event of sickness and disability. In the past this coverage was limited to paying the minimum monthly payment if you met the insurance requirements. However, the insurance on many cards now pays 10% of the balance on the card at the time your claim commences and may be worth considering.
Just do be very careful with this insurance as it will exclude any condition you suffer from at the time you take the insurance.
Taking out a new credit card is more complex and requires more thought and consideration than it often seems at first. As you can see, when considering a new credit card there are a number of aspects which must be taken into account.
The good news is that there are many comparison services available that can help you cut through the confusion and let you compare many of the aforementioned features before you ever apply!