Navigating the deluge of credit cards

Posted on January 28, 2008
Filed Under Advice, rates | Leave a Comment

In a country from which there are hundreds of credit cards to choose, picking one that best suits your financial needs and lifestyle is no easy task.

There are cards that offer rewards, cards that tout low interest rates and cards that have no annual fees.

Many of these credit card offers have been dropping into mailboxes recently. January is a busy month when it comes to applications sent out by credit card issuers. That’s not surprising, given that many people who used their credit cards heavily in December for holiday shopping may be in the market for a new one.

“We’ve heard that from card issuers, and we’ve seen that in our business,” said Bill Hardekopf, chief executive officer of Lowcards.com, a Web site that helps consumers compare credit cards. “This is the time that many households get their credit card bill and realize just how much they spent during the holidays. They may look for a new credit card to transfer the balance to a lower rate or because they are close to the limit on their current cards.”

No matter what card is chosen, consumers should read the fine print and educate themselves about late fees, minimum payment requirements, cash advance fees and other policies before signing up, experts advise.

“If it sounds too good to be true, you really have to take a look at it,” said Noelle Fischer-Herbert, vice president of corporate development at Pacific Service Credit Union in Walnut Creek, Calif.

How current a consumer is in keeping bills paid off is a key factor in deciding what kind of card best suits a person.

Consumers who use credit actively and pay off their balances every month might want to consider a rewards card.

“While interest rates are important, it does not really factor in because they are paying the balance every month, so, in theory, there is no balance to carry the interest on,” Fischer-Herbert said.

A rewards card provides points that can be applied toward buying merchandise or services such as airline miles or hotel stays.

“If you want to get something back, opt for a rewards card, but only if you don’t expect to carry a balance,” said Norma Garcia, senior staff attorney with the San Francisco-based West Coast office of Consumers Union.

But some reward cards may have annual fees and charge higher interest than cards that don’t offer rewards points, Garcia said. So if rewards aren’t that important, consider a credit card that has no annual fee and a lower interest rate, she said.

Consumers who don’t pay off their balances every month should opt for a low-interest-rate card, experts say. That’s because a greater portion of monthly payments will go toward paying down the principal.

Low-interest-rate cards come in two categories: permanent and introductory. Consumers who think it might take a year or longer to pay off credit card debt should consider a card that has a fixed low interest rate, Hardekopf said.

Introductory cards have the lowest interest rates, sometimes as low as zero, which typically last for three months to one year, he said. After the introductory period ends, the interest rates can increase substantially.

Transferring a large balance from a higher-interest card to a credit card with a low introductory rate could be the right move for consumers who are able to pay off the card before the expiration period.

Keep in mind that the introductory rate applies to the transferred balance, not new purchases. The higher interest rate charged on the new purchases could wipe out the financial benefit of transferring the balance from the old card, said Hardekopf.

Also, once the introductory period ends, any of the transferred balance not paid off would be subject to the new interest rate. Some introductory-rate cards also have balance-transfer fees.

“You need to read the fine print of the terms and conditions of that card,” Hardekopf said.

Despite some of the drawbacks, these low-rate cards can be beneficial if the consumer expects to be able to pay off the transferred balance before the introductory period expires, Fischer-Herbert said.

For example, a consumer who had $10,000 in debt on a card that charged 15 percent interest would see a huge drop in interest payments if the debt was transferred to a card with a 1 percent introductory rate, she said.

“You get a bigger bang on the principal,” she said. “You just have to make sure the consumer is going to pay off the balance before the introductory period expires.”

By Eve Mitchell

Comments

Leave a Reply