Finding the right credit card
Tips and hints for finding the right credit card for your needs
There’s a lot more to a credit card than just the interest rate. From low annual fees to cash back offers, credit cards come in a wide range of flavours to suit many different lifestyles and budgets.
With that in mind, here are some important things to think about as you search for the right card, and some tips on what to watch out for.
Know your spending style
Everyone has different spending habits, so it’s good to understand how you’ll be using your credit card.
• Do you use your card every day, or just for emergencies?
• Do you pay off the entire balance every month?
• Are rewards important to you?
Knowing the answers to these questions is important, as it will help you narrow down the choices. For instance, if you’re the kind of person who only uses their credit card for emergencies, a no or low annual fee card might be the one for you.
If you like to take things slow and only make the minimum payment each month, you might choose a credit card with a low interest rate over one with fancy rewards.
Then again, if you like to charge everything but are always careful to pay off the balance, a rewards card with all the bells and whistles could be the right choice for you.
Find your perfect match
To help you find the right credit card for your needs, here’s a look at the different types of cards, and the pros and cons of each.
Cards with balance transfer offers
If you’re struggling to pay off your balance or have multiple cards, a card that comes with a balance transfer offer can make good financial sense.
With a balance transfer offer, you can shift existing credit card debt to a new card with a low, or even no, interest rate for six to 18 months or more, depending on the offers available. During the balance transfer period, every dollar you pay back goes towards your balance, helping you get out of debt faster.
If you decide to take advantage of a balance transfer offer, be aware that:
• The special interest rate only applies to your transferred balance for a limited time, typically six to 18 months.
• You’ll need to pay a balance transfer fee. This is usually around 3% of the entire amount transferred.
• Often interest will be charged at standard interest rates for any new purchases or cash withdrawals on the card during the balance transfer period.
• Only paying just the minimum monthly payment on your statement won’t pay out your debt before the balance transfer period has ended.
• Interest will be charged at the standard interest rate on any transferred balance that is unpaid at the end of the balance transfer period.
• If your new credit card is linked to a rewards program, you probably won’t be entitled to earn any rewards points while you’re in the balance transfer period.
• There’s typically a cap on how much you can move across to your new credit card under a balance transfer offer. The amount will depend on the offer, but expect a cap based on percentage of your credit limit (e.g. no more than 70% of your credit limit) or a fixed cap (e.g. $10,000).
• If you default on any part of your agreement, such as missing a payment or going over your credit limit, the interest rate that applies during your balance transfer period can immediately revert to the standard interest rate.
• Balance transfer offers are usually only available to new customers, so it’s unlikely that you’ll be able to take advantage of any balance transfer offers that your current provider may have.
While discipline is required to pay off your balance before the ‘revert rate’ (usually the same as the purchase rate) kicks in, taking advantage of a balance transfer to smash down debt is a great way to make a new credit card work to your advantage.
Do you charge everyday purchases such as groceries, clothing and utility bills to your credit card? Are you a stickler for paying down your balance every month? If so, you could make your money work harder with a rewards card.
Every time you spend money with a rewards card, you’ll earn points that can be redeemed for valuable rewards, including:
• Cash back. Exchange earned points to reduce the amount you owe.
• General rewards. Redeem rewards points for everyday items, such as appliances, gift cards and magazines.
• Instant rewards. Receive automatic discounts with participating merchants – for example, $10 off at the supermarket when you reach a certain number of points.
• Frequent flyer miles. Redeem rewards points for airline tickets and upgrades.
• Concierge service. On-call service to handle requests such as booking a restaurant or tracking down a product.
Because of the extra benefits, rewards cards usually come with higher interest rates and annual fees than other cards. However, if you use your card frequently and pay off the balance every month, you might find that the benefits outweigh the cost.
When choosing a rewards card, think about the types of benefits you prefer. After all, there’s no point in getting a card with instant rewards if they’re only for retailers you never visit.
Also, be sure to compare points and fees across different programs. While one card with a $60 annual fee might require a $20,000 accumulated spend to get $100 back, another card with a $150 fee might only require $6000 in purchases before you get a reward.
Low interest rate cards
Low interest rate credit cards can offer a lower purchase rate compared to most other cards. This can add up to significant savings on interest charges if you carry a balance from month to month. For example, low rate cards can offer interest rates as low as 13%p.a. on purchases as compared to higher rates of other cards, such as 19%p.a. on purchases.
When choosing a low interest rate card, be sure to look at and compare these two key interest rates:
• Purchase rate. This is the interest rate charged for everyday purchases. Remember, you can get purchases interest-free if you pay off your entire balance every month.
• Cash advance rate. This is the interest rate applied to cash withdrawn from a bank or ATM. Cash advance interest rates are often higher than purchase rates and start to accrue from the date you withdraw your money. There’s also no interest free period and you can’t avoid the interest charges by paying off your balance at the end of the month.
Keep in mind that low interest rate cards often come with a higher annual fee. The key is to balance the cost of the fee against what you think you’ll save on interest every year.
Low or no annual fee cards
Low annual fee or no annual fee cards are a good option if you want a backup card for emergencies, but don’t want to pay a big annual fee. The trade-off is that most low annual fee cards come with higher interest rates, making them a good option for people who can pay down their balances every month.
Remember, some card providers will waive the annual fee provided you spend a certain amount on your card each year. Alternatively, you might be able to redeem rewards points to pay the fee. Always check the terms and conditions of the card before making your decision.
Things to watch out for
Not all credit cards are created equal. From cash advance charges to late payment fees, different cards will have a different impact on your wallet.
As you compare various offers, be sure you understand the terms and conditions of each card, including:
• What, if any, is the annual fee?
• What is the interest rate for purchases versus cash advances?
• What happens if you make a late payment or go over your credit limit?
• What, if any, is the foreign transaction fee?
• How long does the promotional period last, if there is one?
In particular, watch out for credit cards offering a special low introductory rate. While these cards may be a great deal at the beginning, high interest rates after the honeymoon period ends can easily wipe out the benefits.
As always, check the terms and conditions on your credit card and make sure you understand the different charges and fees.
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