Jean Chatzky
Here’s a guide to different cards for different purposes.
Card for a Big Purchase
You know you’re going to be buying a new refrigerator or re-carpeting the house. These aren’t purchases you’ll be able to pay off in a single month — or even two.
What’s the best card for this situation? One with a low-interest rate and no annual fee.
The goal isn’t to rack up points or rewards, it’s to pay off a big purchase without adding hundreds of dollars to the cost of that purchase in interest. Shoot for a lower rate card in this scenario.
Balance Transfer Cards
The other way to pay for that new fridge is to charge it on an existing card and then move the charge to what’s called a balance transfer card. This allows you to shift high-interest debt from one card onto another card with a lower interest rate. This can help you ditch your debt faster since your payments will all go toward your principal balance, not interest charges.
You’ll need a very good credit score to qualify and you’ve got to be very disciplined with balance transfers to pay off the balance before the interest rate jumps.
Remember: it’s a balance transfer, not a balance elimination. One expert notes, “If your problem is overspending, transferring to a 0% offer can give you a false sense of security, and if the spending doesn’t stop, it can lead to more problems.”
Also, keep in mind that with a balance transfer, you often have to pay an upfront fee of 3% to 5% for the transfer. Do the math to make sure you’ll save enough to be worth it. And make sure you read the fine print — some balance transfer cards specify that if you don’t pay off your debt in a specified amount of time, you could end up paying retroactive interest. One way to keep yourself in check with these cards is not to use it for new purchases except the big one you’re planning on.
Rewards Cards
If you have good credit, rewards credit cards may be right for you. But remember, like any other credit card, a rewards card is good only for someone who pays off their balance on time and in full each month. If not, the interest rate on your balance is going to far outweigh any rewards you’d get.
If you do meet that criteria, the next question is: what type of rewards do I want?
- If you travel frequently or are especially loyal to a particular airline, consider a travel card that gives you points or miles.
- If you’re not loyal to one airline, consider a travel card that’s more agnostic — allowing you to use your points on a variety of airlines and hotels.
- And, if you’re not sure you’ll redeem at all, then opt for a card that gives you a percentage of cash back on every dollar that you spend. Cash can be used anywhere.
Reaping rewards can be and feel great. But Arnold reminds us that rewards cards are designed to make us spend more — so if you have a penchant for overspending, be weary.
Secured Cards
Finally, if you have no credit, bad credit, or limited credit, secured credit cards can help you establish and re-establish credit. With a secured card, you put down a deposit, and that amount becomes your credit limit. Deposit minimums differ depending on your financial institution. Depending on your circumstances, it might be difficult to come up with that amount, which is one of the drawbacks of secured cards. But if you can swing it, it’s often a good idea.
If you use a secured card for 6 months to a year, your scores may go up, and seeing that kind of improvement is motivating. Many users may see their scores up 50 points in one year.
Just note, secured cards can only help your score if the card issuer reports your on-time payment activity to the major credit bureaus so that your good behavior works in your favor. Ask the lender before you apply for a card whether they will report on your behalf.
Comparison Tips
Once you know what type of card you want, try to examine all the different cards within that category. Several card comparison sites on the web can help with this. They’ll outline key features of the cards and allow you to compare them side-by-side. Don’t just look at one site, look at several.
Be aware that 95% of sites out there only list cards that advertise with them. You’re getting a very small sample of the overall credit card options. There are a lot of offers out there and it pays (literally) to do your research. Compare these with the cards that are offered by your credit union or bank. And in every case, look at the terms and conditions of each of the cards. The fine print is always important.
With Molly Povich
Chris O'Shea
