The credit card is among the most important personal finance tools that you can have. While it can make life easy in a number of ways, it can also ensnare you in a debt trap that can make your life miserable if you do not use it responsibly. It is, therefore, very important to choose a credit card well. Some of the most important considerations in choosing plastic money:
Your spending habit is a very important consideration in choosing a credit card. You could either be a disciplined user who will pay off the entire balance by the monthly due date or be one of the carefree fellows who spend their lives scrambling to pay the minimum monthly card dues after having swiped the card for every expense. You could also be very conservative and lock away your card and use it only in case of emergencies.
The rate of interest is of no consequence if you intend to pay off the entire card dues by the due date. A card that gives a long credit period and does not charge an annual fee will be the best choice. However, if you are going to be rolling over your dues, then opting for a card with low APRs will save you a ton of money in interest. If you want to use your card for your daily expenses then choose a card with a substantial credit limit and a well-structured rewards program. A card without any frills but offering a low-interest rate and fees is the best choice if you use it only for emergencies.
The Rate of Interest
In credit card terminology, the rate of interest is usually referred to as the annual percentage rate or APR. Usually, in most cards, it is a fixed rate that may be revised from time to time but some cards may have a variable rate that may be benchmarked to a commonly-accepted financial indicator like the prime lending rate. The advantage of a fixed interest rate card is that you know for sure what the APR is but with a card that has a variable rate, your interest outgo can be dynamic. The rate of interest charged by the card issue depends on your credit score, your personal profile, as well as triggers like going over-limit or paying late. The same credit card issuer can and does charge different rates of interest to different customers depending on their assessment of their risk profiles. Generally, the rate of interest charged by cards is high because the loans are unsecured and the card issuer may lose everything in case of a customer defaults.
The Credit Limit
The credit limit permitted to a customer on his card refers to the maximum outstanding that he can have at any point in time. In other words, this is the maximum amount of money that the card issuer is willing to risk on you. The credit limit allocated to you is arrived by considering a number of parameters including your credit score and your personal profile, including whether you are salaried or self-employed. Depending on the assessment by the card issuer, your credit limit could range from a few hundred dollars to several thousand. Usually, card issuers have different types of cards with different features, conveniences, rates of interest, reward point programs, etc. for different categories of customers allotted different credit limits but even within the same type of card, there can be many different credit limits allotted to customers. With regular use and prompt payments, the card issuer will generally offer you higher limits.
Computation of Balance
If you intend to just pay the minimum monthly dues and rollover your balances, you should find out how the card issuer computes the finance charge as it will make a severe dent in your budget. Most card issuers will use the average daily balance method, which means that you pay the applicable rate of interest on the sum of the actual balances every day divided by the number of days in the credit card billing cycle. There are also cards that calculate the interest payable based on two billing cycles but you need to stay away from them as the interest charged is more under this system. Read up debt consolidation reviews online for examples of balance computation.
Fees and Penalties
You should be very well informed regarding the various fees and penalties that the credit card issuer charges. Not only will you pay very high late payment fees in addition to the steep rates of interest charged on the rollover amount but also, you will be levied extra fees if you take a cash advance, ask for an increase in your credit limit, buy something on EMI, or even make payments by phone. You also can expect a hefty fee to be charged if you go over-limit. With fees and penalties abounding, it is always very good sense to look for a card that has reasonable fees and do not charge extra for participating in the rewards program. If you are looking to making a balance transfer, you should try and find a card that will allow you to do so without charging any fees and also give you the longest-possible period at zero percent interest. To find a card that works best for you, you should read the terms and conditions thoroughly and understand all the fees and penalties that you may be socked with. Some of the cards that offer really attractive features often carry the steepest fees.
Essentially, when you are choosing a credit card you should consider your spending habit, the rate of interest, the fees, and penalties, as well as the method of interest computation. Be sure to also check out the rewards program as you can benefit a lot by way of travel points, cash back or reward points redeemable against a variety of goods in the reward program catalog. Read the terms and condition of the reward program before making up your point as there are usually several riders and restrictions on point accumulation, use, and expiry.