Like many people, you probably have an unending stream of credit card offers in your mailbox each week. The discerning consumer knows that each credit card invitation can be very different, requiring time to carefully review each offer before choosing the best one. If you're in the market to expand your credit line with a new account, here are four major factors to consider.
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1. The Interest Rate
As the most common factor affecting whether a credit offer is deemed worthy, the APR (annual percentage rate) associated with the card can make or break a deal. Since most cards compound interest monthly, you would take the APR and divide it by 12 to get the actual cost to borrow money. This number is what purchases would cost each month, if not paid in full.
Looking at the advertised APR alone is not a guarantee of a card's value, however. Very rarely is the introductory rate permanent, and it's important to read the terms of a card to answer the following questions:
- Is the APR being offered for a limited time?
- Is there a minimum purchase requirement to activate or keep the rate?
- Is the rate for purchases only? Does it apply to balance transfers and cash advances?
- Is the rate subject to approval? Could your actual rate vary from that being offered upon a review of your credit?
Weighing the variations of an interest rate could give you surprising results. After looking over a card's terms in more detail, the offer that initially looked like the best deal may not stack up. (To learn the pros of using a credit card, and why it's best to know what you're getting into, read 10 Reasons To Use Your Credit Card and Forget Your Bank Account - Use Your Credit Card.)
2. The Annual Fee
Cards with annual fees used to be an exception, not the rule. With recent card regulations going into effect, however, cards that previously didn't have annual fees may soon have them, and other fees are emerging. This new trend will make fee-free accounts even more attractive, and that could be the mark of a card only offered to the most qualified borrowers.
When comparing cards based on annual fee, be sure that you understand how and when the fee will be imposed. Will it take place at the beginning of the year, or will it be tacked on as a charge at the end of 12 months? Is there a way to waive the fee with a certain number of transactions or a minimum charge amount? If you decide that a fee isn't enough of a deterrent to keep you away from a card, call the card's customer service line and ask about having it waived for the first year. Many will want your business badly enough to give you a pass. (Learn more about new credit card fees and regulations in How Your Credit Card Is Changing.)
A mark of a stellar card offer used to be measured in how many rewards an active account holder could rack up. The days of getting free flights to Europe and posh hotel stays in exchange for placing a year's worth of business expenses may be over, however. Card holders are reporting that as a result of economic difficulties and the new regulation, their rewards are losing value quickly, or are becoming harder to redeem for rewards that they really want.
So how does a card's reward influence its overall worth? While it can be taken into consideration, it must never be the sole factor in deciding if it's the best card for you. Some points to ponder regarding rewards include:
- Is the minimum reward requirement so high that earning it is difficult or costly?
- Do rewards or points expire? If so, how long do you have to use them?
- Can reward points change in value? Will you be notified of the value change in time to cash out beforehand?
- Are the rewards something you can take advantage of? (Airline rewards for someone who can no longer travel, for example, would be of little value.)
- Are rewards transferable? Can you purchase extra points to build up your account for a major redemption?
If handled carefully, reward points can be a great tool for padding your discretionary budget. Just be certain the value of rewards earned doesn't exceed what you pay out in interest. (Learn more about evaluating a credit card's rewards package, read Take Advantage Of Your Rewards (Card).)
All cards are not created equal, and one area where this could not be more apparent is usability. If a card is difficult to use, its value is significantly lower (unless your goal is to make spending so tricky that it doesn't happen, at all). Some cards offer amazing additional services that are available to anyone with an account. Others reward their members with added convenience perks to encourage spending and create a sense of loyalty. Before you commit to a card that looks great in all the right places, consider these bare bones conveniences: the ability to pay by phone/email/online/mail, 24/7 customer service, international assistance for no extra charge, free account alerts and an abundance of ATM locations.
The Bottom Line
Finding the right card shouldn't be a quick decision. Take time to read terms with care, call and ask questions of anything that is unclear, and make certain that all factors are weighed in accordance to your financial needs and lifestyle. Additionally, if your current offers few of the most common benefits, it may be time to move on. (Paying these rates can impact your disposable income and your investment returns. For more information, read Understanding Credit Card Interest.)
Catch up on your financial news; read Water Cooler Finance: The Ups And Downs Of A Double-Dip Recession.