10 tips to finding the right credit card
By Michael Totten
Even in today's challenging economic climate, credit cards still make good financial sense. However, it is easy to become lost amid all the options and fine print. In your search for the best credit card to suit your needs, these 10 tips could save you hundreds of pounds.
Tip #1: Assess your credit rating
Your credit rating lets banks know how well you can manage debt. The better your credit rating, the better the conditions of the credit cards for which you will be eligible.
Protect your credit rating by always paying all your bills on time and never maxing out your credit cards. The ratio between the amount of credit you have and the amount you use is called the utilisation ratio. A history of high utilisation ratios counts against you on your credit rating.
All credit information remains on the credit report for six years. Accounts and credit cards which are no longer used, but which have not been formally closed, will remain on your credit report indefinitely.
Ask a credit reference agency for a copy of your credit report at least once a year, to check your current credit rating and to ensure that all the information is correct. A Statutory Credit Report, containing your basic credit file, will cost you £2. The three credit reference agencies operating in the United Kingdom are Experian, Equifax, and Call Credit.
A poor credit history will not automatically disqualify you from getting a credit card. Credit cards designed specifically for those with credit problems or little or no credit history, such as students or recent immigrants, include Aqua Mastercard, Capital One Classic, and Vanquis Visa. These credit cards have low credit limits of no more than £2,000 and steep annual percentage rates (APRs) of 30% or even 40%, but you can avoid these interest charges entirely by always paying off the balance. After a year of reliable payments, you should have built up a good enough credit history to apply for a more desirable credit card.
Other low-credit options are the secured credit card and debit card. Secured credit cards are no longer available in the UK, but can still be obtained in continental Europe. They require a deposit of between 10% and 100% of the 'credit' value of the card. Debit cards are linked to your bank account. Solo and Electron debit cards automatically check your balance with each transaction, making overdrafts impossible. Switch, Visa, and Delta debit cards don't necessarily check your balance, so you may find yourself in an overdraft situation. If you have an overdraft agreement with your bank, the interest rate will be lower than if you don't. Prepaid debit cards are popular for travel abroad because they don't link with bank or credit accounts or other personal information, and thus remove the risk of identity theft.
Tip #2: Check the income stipulation
Being turned down for a credit card hurts your credit history, so don't apply for any credit card where the income stipulation exceeds your income.
Tip #3: Determine your spending habits
When you compare credit cards, consider your spending habits carefully. If you pay off your balance in full every month, the interest rate won't matter. However, if you usually carry a balance, the interest you pay will often wipe out the value of any reward earned through a loyalty programme.
If you spend a lot but pay off the balance regularly, look for a card with a low or no annual fee and with a good cashback or reward incentive.
If you regularly carry a balance, look for a card with a low APR, and also consider getting a card with a promotional rate on transferred balances.
Tip #4: Balance transfers
Many credit cards will offer 0% on balance transfers for a period of time between three and nine months. Some credit cards will charge a balance transfer fee, usually 2% to 3% of the balance.
Whenever you don't pay off the balance in full, credit card payments are always applied first to the balance segment with the lowest interest rate. This means that if you transfer a balance under a promotional rate and then continue to shop on that credit card, your payments will be applied to the transferred balance first, and not to the new spending under the much higher interest rate.
To protect your promotional rate, don't shop with the balance transfer credit card until the promotional rate has expired. Also, be careful not to immediately charge up the cleared card to the original balance rate. If you could not pay off the balance before, how will you deal with twice that balance, especially once the promotional rate expires?
Tip #5: Monthly minimum payments
Monthly minimum payments on most credit cards range between 2% to 5%. While a credit card with a low monthly minimum payment may seem attractive, keep in mind how much longer it will take for you to pay off the balance at the lower rate, and thus how much more interest you will be paying. If you regularly pay off the balance but want some leeway for emergencies, you might search for credit cards which offer the option of lower minimum payments or skipped payments.
Tip #6: The real cost of loyalty rewards
Many credit card providers have teamed up with multiple partners to provide a loyalty programme to appeal to just about every taste. Some of these offer product-based loyalty rewards, such as free flights or hotel stays. Others offer a cash-back percentage based on the cost of your purchases.
When searching for credit cards with loyalty programmes, limit your initial search to rewards you want and will actually use. Then check the fine print for limitations and expiry dates. If a travel credit card offers tiered free upgrades which expire after a year, are you going to be able to use the reward? If the only time of year you can travel is during Christmas but the travel reward has holiday blackout dates, you might as well not be getting any reward at all.
If you pay off the balance each month, using a credit card with a loyalty programme is equal to getting a small bonus each time you shop. If you carry a balance, the amount you are paying in interest will probably be higher than the value of the reward.
Tip #7: Annual fee
Some credit cards charge an annual fee. Others do not. A card with an annual fee may be a good choice if it saves you more than the amount of that fee in interest, service fees, or loyalty perks. This is easiest to track with a cash-back card and where you know the typical amount you spend in a month. Another consideration may be that credit cards with annual fees may provide higher levels of desired perks, such as travel insurance. If the gain outweighs the cost of the fee, consider getting the credit card with the annual fee.
Tip #8: Determine the transaction network
Where will the credit card be accepted? Will ATMs hosted by the transaction network dispense pounds only, or euros as well? What are the service fees for using another transaction network's ATMs? Within greater London, these questions might not matter too much. If you travel a lot, they might matter a good deal. Before choosing a credit card, frequent travellers should check the service fees for foreign exchange and other national and international use.
Tip #9: Sign your card at once
When your credit card arrives in the mail, check to make sure all the information is accurate, then sign the card immediately. If your credit card is of the chip and PIN variety, never keep a written PIN in the same place as you carry your credit card. Check your statement regularly, and verify each purchase. Contact the credit card company at once if there is a discrepancy.
Tip #10: Reap the rewards
Enjoy the loyalty perks and the freedom that comes with your new credit card, but don't forget that it is credit that will need to be repaid, and not a part of your income. Spend responsibly, and enjoy the rewards that come with continued good credit.
Published: 6 April 2009
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