Every day another tantalizing credit card offer hits your mailbox: No interest for the first 12 months. Save $30 toward future purchases instantly. Earn free money for your child's college education. How do you pick the best cards for your financial situation? Most Americans don't; they simply keep getting more. Today, the average household owns a whopping 13-14 bank credit cards, retail cards, and debit cards, according to cardweb.com, a payment card research company.
Trouble is, the more plastic you have stuffed in your wallet, the more money woes you're likely to have -- and it's all too easy to fall behind.
But even if you always pay them off, it's a good idea to own only two or three cards. "Future creditors look not just at what you owe, but at what you are capable of borrowing," explains Michele Johnson, spokesperson for the National Foundation for Credit Counseling, a nonprofit credit counseling network. In other words, just the potential to run up a lot of debt can scare off lenders. So to get the best rate, don't carry around a card catalog. Here's how to evaluate offers and determine the best cards for you.
There's nothing to dislike about a low interest rate, particularly if you tend to carry a balance. If you can slash your APR -- that is, your annual percentage rate -- from 15 percent to 6 percent, you'll save $131 if you pay 10 percent each month on a $1,500 balance. These days you can even find zero percent rates for the first six to 12 months.
But before you get too excited about a new card, make sure that you actually qualify for the low rate. A report by Consumer Action, a nonprofit organization, found that more than one-third of issuers don't provide a firm APR until after they have screened an applicant's credit history. This makes comparison shopping tricky. Even if the offer you receive claims you are "preapproved," don't believe it. "More than half the time you still don't get the rate offered," says Ed Mierzwinski, consumer program director for the Public Interest Research Group (PIRG), which monitors consumer trends.
What's more, "most cards do bait-and-switch," says Mierzwinski. You start off with a low interest rate but the slightest misstep can cause your rate to soar. For instance, you might send a payment in a few days late. Even if that slipup was with an entirely different card, your rate could increase on all your cards.
Advice: Read the disclosure statement that comes with the offer to find out what your APR will be once the initial teaser rate has expired. If it will rise above the average rate of around 12-14 percent, look for a different card. To avoid late fees, sign up for automatic payments online. This will help you maintain a good credit rating and a competitive interest rate. "Your credit score has to remain the same or get better for your rate to stay the same," says Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies.
Of course, issuers can change your rate at any time, provided they give you 15 days notice. If your rate does increase, call and negotiate for a lower rate. According to a study by PIRG, more than half of consumers who called their issuers successfully lowered their rates.
Transferring a high credit card balance to a card with a lower rate is a great way to consolidate debt, reduce monthly expenses, and free up cash. But finding a good offer takes some close reading. Many cards charge balance transfer fees, typically around 2-3 percent of the balance. Also, some apply the low APR only to the balance -- not to new purchases. "Then what happens is if you use the card for purchases at a higher rate, your money is used to satisfy the lower rate payment first," warns Linda Sherry, spokesperson for Consumer Action.
Advice: Look for a card that offers the same interest rate for balance transfers and new purchases. Ideally you won't make new purchases. "If your goal is to get out of debt, take advantage of the low-interest introductory offer and then work like crazy to pay everything possible without using the credit card for additional purchases," says Johnson. She also urges consumers to close the old account, a move that will help raise your credit rating. One more caution: Don't transfer disputed charges; you'll lose the right to deny payment to the seller.
These cards award points, dollars, or cash value based on how much you charge. In many cases, you accumulate more points if you charge in specific stores. For consumers who pay off the balance on time every month, the programs essentially offer something for nothing. "We recently had a card member plan a trip across New Zealand -- paid for entirely with reward points," says Judy Tenzer, a spokesperson for American Express.
Advice: Customers who carry a balance should make sure that the APR is low or those "free" goodies can be expensive. When you pay off your balance every month, interest rates are irrelevant, but you still want to avoid an annual fee if possible. Next, find out what the restrictions and rules are. For instance, is there a waiting period before you can redeem rewards? Is there a cap on rewards? Will points expire? If you plan to use the card for travel, are there blackout dates? Studying the details will help maximize those rewards.
When it comes to unauthorized charges, consumers already enjoy protections under the Truth in Lending Act and the Fair Credit Billing Act, which make you liable for no more than $50 in fraudulent charges. Moreover, all major card issuers today have zero liability policies.
Advice: There are a couple ways to add protection. If you do a lot of online shopping, you can get a card with a built-in "smart chip." Such cards come with a reader that you attach to your computer. When you want to make a transaction online, you insert your card and enter an access code. Another option some cards offer is a single-use card number. "You go to your credit card issuer's site and get a substitute number to use on a vendor's site," explains Susan Grant, vice president of public policy for the National Consumers League. "Then you don't have to worry about transmitting your real number or having someone get hold of it."
For consumers who may not qualify for a regular credit card and for college students just starting out, a prepaid card is an excellent option. You can use it anywhere a traditional credit card is accepted, but you have a built-in spending limit.
"Keep in mind, though, that even with prepaid cards it's possible to overdraw an account -- and run up penalty fees. The bank's records don't always keep up with your charges," says Jones. These cards also make great gifts, because recipients can spend them at more than one store. What's more, unlike most gift cards, prepaid cards are usually refundable if lost or stolen.
Advice: Study the fees closely. Many prepaid cards require a one-time activation or set-up charge. Mastercard.com lists 16 prepaid cards with activation fees ranging from $6 to as much as $30. Some cards have monthly maintenance fees as well as a charge to close the account and receive any remaining balance.
Similar to prepaid cards, debit cards help limit your spending. However, because debit card owners receive a monthly statement tracking their purchases, credit counselors consider them a better budgeting tool than a prepaid card. Another advantage to a debit card is lower ATM fees. Depending on the bank, customers may also earn interest on their money. Debit cards don't always offer the same dispute protections as credit cards, though. That's why Grant recommends using a debit card only for cash-and-carry purchases.
Advice: There are two types of debit cards -- signature cards and PIN cards. PIN-based cards may be more secure if your card is stolen. "If you lose a debit card and it doesn't require a PIN, someone could empty out your bank account by faking your signature," says Grant. "Under the Electronic Funds Transfer Act, you are liable for just $50 in unauthorized debits as long as you report them within two days of discovery. Liability jumps to $500 if reported between three and 60 days; after that, you could be liable for the whole loss from your checking and overdraft accounts. However, some banks offer zero liability policies that protect you from any loss if you report the problem within a certain time."
This may be the most enticing pitch of all. Instead of forking over the traditional 5 percent or more of your balance each month -- a minuscule amount to begin with -- today you can make minimum payments of as low as 1.5 percent.
Advice: After a tough month, it's reassuring to know that you only have the minimum to worry about. But don't start bad habits. By carrying a $1,000 balance at 18 percent interest and paying the minimum of 1.5 percent a month, it will take you 17 years to pay off your card, warns Johnson. So next time you see something on sale, keep in mind that if it sits on your card for years it won't be a bargain any longer.
Originally published in Better Homes & Gardens magazine, August 2004.