In order to end up with the credit card best suited to your needs, you have to clearly understand what you are looking for and what options are available to you. This is done by researching in two areas.
Firstly, you research the market to find out what kinds of credit cards are available, familiarizing yourself with their different features. Secondly, you examine your own unique requirements in a credit card.
Research the market: Credit Card essentials
The first part of the research step is to investigate just what's available in the credit card market. The range of options can seem daunting, but you can make a good start by understanding the following major features:
Basis of Card: Credit cards are offered on different principles, including unsecured - the regular, most common type; secured - a security deposit has to be paid; premium - high level cards (often with names like 'gold' or 'platinum') with higher credit limits and other benefits; and pre-paid - the funds available on the credit card are paid in by the card holder, rather than borrowed as credit from the financial institution. In a similar fashion to pre-paid cards, there are debit cards such as the Visa debit card. This functions like a credit card in that it requires a signature and it can be used for internet and telephone purchases, but it draws only up to the limit of any cleared funds available in the cardholder's account. There is really no actual 'credit' offered - if the cardholder has $100 in their account, then that is all that's available on the credit card. This debit card with credit card functionality is an excellent option for people who need the purchasing flexibility of credit cards but don't wish to risk getting a credit card debt.
Type of Card: There are a number of different cards, including Visa, MasterCard, American Express and Diners Club. Each offers different rates, incentives, conditions and accessibility and you need to examine the cards closely to get the best match for your needs. Merchants pay fees whenever you make a purchase with a credit card, and some traders limit the cards they accept; your favourite shop may accept Visa, for instance, but not American Express.
Card Provider: As if it wasn't already sufficiently complicated, once you have an idea what card basis and type might suit you, there is another factor in the equation; the card provider. Credit cards are provided by banks and other financial institutions, and the rates, conditions, fees and incentives may vary. There is intense competition amongst credit card providers, and comparison shopping can secure you an excellent deal, particularly when getting a credit card for the first time.
Annual Percentage Rate (APR): The APR, or interest rate, of a credit card can make a huge difference when it comes to both monthly payments and how long it takes to clear any outstanding amounts.
There are three main types of APRs - multiple, fixed and variable, and some variations within these. Depending on your specific needs, choosing which APR is best for you is one of the most important decisions to make.
Fixed Rate APR: If you have a mortgage you will probably be aware of fixed rate interest. The same applies to credit cards and fixed rate APR - the interest will always stay the same. Even if there is a reason that it needs to alter, then the credit card company must inform you first, offering an excellent safety valve.
Variable APR: Many credit cards offer a variable rate APR, which means that the interest rate can fluctuate. Most credit cards that have a variable APR are tied into a country's Treasury or National Bank interest rate - therefore, if that increases or decreases it will have a knock-on effect with the credit card.
Multiple APRs: A separate APR for purchases, cash advances and transfers of balance. Cash advance and transfer APR's are usually higher than purchases, so check this first.
Tiered APR: The APR change as a set balance amount outstanding is reached. For example, if your balance is under a certain amount you may be charged 15% but once you go over that amount, the APR rises to 16% and so on.
Penalty APR: Usually applying to late payments, your interest rate will increase substantially if you miss a payment more than once in a certain period.
Introductory APR: This is usually a sweetener to entice you to go with a particular company over another. These are usually for a limited period of time.
Delayed APR is when interest is held until a certain date - a 6-month special offer, for instance.
Grace Period: Sometimes known as an interest free period. With any credit card, you normally have a certain amount of time allowed to pay your full outstanding balance before being charged extra. This is known as a “grace period” and can differ quite a bit from one credit card company to another.
For instance, one card company may allow you 25 days from the date of your statement before charging you interest (the finance charge), while another company may only offer you 14 days. Beware, though - grace periods are usually only for new purchases; cash advances and balance transfers are normally chargeable immediately.
Additionally, grace periods are only applicable if the credit card company offers them - there are some cards that charge immediately, particularly if you have transferred a balance from another card and then made a new purchase.
Finance Charge: This is the amount you are charged by the credit card service when you do not pay the balance of your account in full within the grace period. The way this charge is calculated varies between providers. It may be calculated using daily, adjusted or previous balances, over various billing cycles, and may or may not include new purchases. The APR is then applied to this balance, using various calculation methods, to determine the finance charge of each particular billing period.
Some providers have a minimum finance charge for each billing period, and if your calculated finance charge is less than this, then you will be required to pay the minimum finance charge.
Fees: There are also fees that apply to credit card accounts. This include the annual fee and a cash advance fee, and may also include fees for late payments, balance transfers and for exceeding the credit limit.
Cash Advance: The cash advance facility allows you to draw cash sums from your credit card, in addition to making purchases. Cash advances usually attract a flat fee and start accruing interest from the moment you get the cash. They are often exempt from sweeteners and grace periods and may attract higher interest.
Credit Limit: This is the maximum amount of credit available on the card and is negotiated with the card provider when you apply for the credit card account. With pre-paid and secured cards the limit is influenced by the amount of the deposit or the sum paid into the account.
Research your needs: Questions to ask yourself
Now it's time to determine what your requirements are in a credit card. For example, will you use the credit card only for special purchases or will you need to use it regularly?
You can start this process by considering the following questions - as well as any others you think of yourself - and recording your answers.
| Have I used a credit card before? |
| | If you have used a credit card, work out what you did or didn't like about the credit card. You may be looking for one exactly like it, hoping to upgrade, or even trying to avoid any particular features that you found inconvenient. |
| What do I need a credit card for? |
| | If your credit card is just for emergencies, then you can probably afford to go for a card with a lower credit limit, which in turn will reduce your monthly payments even with a higher interest rate. If it's for vacation purchases or other high spends, then a higher credit limit card with lower interest rates will be a far better option. |
| Will I use a credit card often? |
| | If so, you need to find the card that offers the best rate. |
| Will I pay the balance in full each month? |
| | A card with no annual fee and longer grace period will be the better option for you if this is the case. |
| Will I use it for emergencies such as cash advances? |
| | Again, a lower interest rate card would be better for you, as well as lower fees on cash advances. |
| Are there any special features with the card? |
| | It may be that you can collect Air Miles (frequent flyer miles or points), or petrol points, or similar promotions whenever you use your card. Other options may be a donation to charity by the credit card company itself each time you use it - so always find out what features your card offers. |
| Is the card insured? |
| | Although credit cards are excellent at stretching finances, they can also place a burden on you if something goes wrong. If you lose your job, for example, or suffer a serious injury that prevents you from working - does your credit card company cover your payments? This is very important to find out. Additionally, is your card covered for purchases made if it's stolen? |
| What do I do if there's a billing error? |
| | There are dedicated steps in place to protect you from a billing error by your credit card company (including fraudulent purchases). Making sure that your credit card company adheres to them will make your decision easier. |
Understanding your needs is the key to a successful choice and you can revisit your list of needs at any time during the “buying” process.
Once you complete this Research step, having informed yourself about the essentials of credit cards and identified your needs, you are ready to move on to the next step: Evaluation.
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