By Ruth Mahoney, President, Capital Region, KeyBank
When it comes to the benefit of credit cards, people have two stances. Either they are good, because they empower people to build credit and provide needed power, or they are bad, because they encourage people to overspend and fall into debt. The truth is, credit cards can be both good and bad—depending on the borrower.
The good: credit cards make it easy to purchase things, and they help borrowers establish good credit by demonstrating that they have the ability and character to repay debt obligations in a timely manner. Building a strong credit history can lead to obtaining other forms of credit, such as car loans and mortgages, with more ease and better terms.
The not so good: according to the Federal Reserve’s G.19 report on consumer credit, total U.S. outstanding revolving debt, which is chiefly made up of credit card balances, was $1.07 trillion as of June 2019, with the average card-carrying adult holding $5,839 in debt.
However, credit cards don’t have to be such a double-edged sword. In fact, with a little effort you can secure a credit card with great terms that suits your needs and spending profile, which will help you reduce fees and maximize rewards.
Every time you apply for credit, it gets reported with the credit bureaus and lowers your credit score. So do your homework ahead of time. Compare and contrast offers, but first, consider which type of credit card best fits your needs.
- Revolving. This is the traditional credit card, which allows you to make purchases and pay all or part of the outstanding balance on a defined schedule. Once all or a portion of the borrowed balance is paid, that amount becomes available again as credit.
- Charge. This card is similar to a revolving credit card in that you can make purchases and take out cash advances. The difference is that you cannot carry a monthly balance. The benefit of a charge card is that you will not accrue interest on your debt.
- Secured. This card requires collateral for approval. Your borrowing limit is determined by the amount of deposit you make to secure the card. It is good option for those with little or no credit history.
- Rewards. Reward cards work the same as traditional credit cards but offer rewards, cash back and/or flyer miles in return for your spending.
- Student. Designed for students enrolled in an accredited four-year college or university, student cards are great for establishing a positive credit history.
Once you determine the best cards for your needs, begin comparing offers from a variety of financial institutions. For example, check interest rates. Different issuers of national bank cards such as VISA, MasterCard and Discover usually charge different interest rates.
You should also review and compare the following:
- Annual fees. Many of today’s cards do not charge an annual fee. However, don’t automatically remove cards with annual fees from consideration. They may have additional perks and benefits that will help you save money and stretch out the value of your dollar.
- Introductory offers. Some issuers offer 0 percent Introductory APR credit cards for the first 12 to 18 billing cycles for purchases and balance transfers. Make sure to read the fine print, because some cards may charge a two to four percent balance transfer fee. Other cards may jump to a high interest rate when the introductory period expires.
- Rewards. Whether it is miles, points, cash back or rewards, review how they accrue. Is the offer valid only during specific time frames? Are there limits on the amount for purchases you can claim with these offers? Some cards may offer promotions for spending a specific amount of money over a set amount of time in order to receive the extra cash back bonus or rewards. Know the details.
- Features. Account alerts, FICO® credit score tracking, no penalty APR, travel insurance and fraud detection are some additional features that can increase the value of the credit card. Don’t overlook these benefits when comparing offers.
Credit is only good if you allow it to work for you—not against you. And rewards and financial incentives can be great ways to earn extra cash and benefits on regular purchases, such as groceries, bills and gas. But make sure you never borrow more than you can afford to repay and always try to repay your balances in full every month. If you can’t repay your full balance, at least pay more than the minimum balance due. This will ensure that you begin building the credit history you need to secure the best rates and terms for future large purchases, like a home or car.
About the author: Ruth Mahoney is regional retail leader and president of KeyBank’s Capital Region. She may be reached at either 518-257-8619 or [email protected]
Understanding credit card terms
If you are considering applying for either your first card or a new card, it is helpful to know the terms issuers use in describing credit card features and options.
Annual percentage rate (APR) – This is the annual interest rate that the credit card issuer charges on the unpaid balance of the credit card. Some credit cards have set rates. For cards with variable rates the interest rate changes. The disclosure statement for each credit card gives the guidelines used to decide what the variable interest rates will be. If a credit card offer has a too-good-to-believe low rate, it is likely an introductory rate. After the introductory period is over, the rate will increase. A low rate could be as low as 0 percent while 28 percent would be high.
Grace period – This is the amount of time you have to pay your bill before interest is charged on your purchases. Most credit cards offer 20 to 25 day grace periods. Even though credit cards have grace periods, most charge interest from the day you make a purchase if you already have a balance on the credit card.
Annual fee – This is the charge you pay once a year for the right to use a credit card. Not all credit cards have annual fees.
Minimum finance charge (minimum payment due) – This is the least amount you will have to pay if you have a balance on a credit card usually. The minimum finance charge is generally between two percent to four percent of the balance.
Transaction fees – These are the various fees you have to pay for cash advances, late payments, or charging over your credit limit.
Cash advance – This service allows cardholders to withdraw cash, either through an ATM or over the counter at a bank or store, up to a certain limit. Check the credit card for a cash advance limit, they are often lower than the credit limit. Also, there is often a fee of three to five percent of the amount being borrowed and the interest rate is generally higher than other credit card transactions. The interest compounds daily starting from the day cash is borrowed.
Balance Transfer – This is the process of moving credit card debt from one credit card to another. Card issuers will often offer lower initial rates to encourage balance transfers coming in and balance-transfer fees to discourage them from going out. If you’re making a balance transfer, be sure you know exactly when the introductory rate expires.
Periodic rate – This is the APR divided by 12.