Selecting a credit card that works best for you is often as difficult as establishing credit in the first place. You have so many choices - most financial institutions offer co-branded Visa or MasterCard cards. In general, though, credit cards vary in least four aspects:
- Annual fees: Some credit cards charge an annual fee. Some cards waive the annual fee for first time customers but charge the fee in subsequent years after the customer has become has become accustomed to using the card. But other cards do not charge an annual fee. Look for these cards.
- Interest cards: Rates vary, generally ranging from 8.5 percent to 20 percent. It pays to shop around and compare interest rates.
- Grace periods: Some credit cards begin to charge interest from the date of each purchase; others begin to charge interest from the date of expected payment. Again, shop around to find a card that offers a longer grace period. In fact, you should reject outright those cards that charge immediate interest from the date of purchase.
- Co-branding: More and more credit cards are partnering with airlines, gasoline companies, and financial institutions to give customers incentives to use their credit cards. Some cards give frequent flyer miles on a particular airline for the dollar value of purchases made with the card. Others offer free gasoline or discounts on purchases. This type of credit card may be advantageous to you, but weight the interest rates and annual fees against the benefits.
Using the two-card system
After you compare credit cards, select two that serve your needs and refuse or cancel all the rest. Determine to use one card with the lower interest rate for large purchases, because you probably cannot pay off the balance in one month, and the other, with the higher interest rate, for smaller purchases, because you will pay off this balance each month.
The two-card system works best when you know that you'll be making a major purchase. Perhaps you know that you need a refrigerator or you want a better sound system. These are big-ticket items, and you probably don't have ready cash available for the purchase.
Become familiar with the timing of the billing for your large credit card purchases and time your major purchases accordingly. For example, if you make a purchase immediately after the billing date and you have a grace period of 25 to 30 days, you have, in effect, free credit for almost two months. If you buy that refrigerator on February 2, the day after your billing date, the purchase will not appear on your bill until March 1. You often have 30 days to pay without interest. If you pay the entire bill on April 1, you will not have paid any interest for that purchase.
If a finance charge is calculated on the average daily balance with newly purchased items included, finance charges are immediately added to your bill, and it's better to pay the bill as soon as you get it, because the charges add up daily.
Use the second credit card for your smaller purchases. Pay the amount due on this credit card in full each month. Limit your spending to accommodate these purchases that you can pay off entirely and those larger purchases that you can manager while still maintaining the comfortable debt ratio.
Many financial advisers will tell you never to take your credit cards out of the house. As soon as you do, their easy availability makes frivolous purchases easier and more tempting.
For many people, the stack of plastic in their wallets gives them a sense of security and pleasure. The greater the number of credit cards, however, the greater the danger of overspending. To avoid costly credit card abuse, consider the two-card system.
