10 Tips on Choosing the Right Credit Card

In a cashless society, not having a credit card can put one in a disadvantaged position, especially when shopping online and taking advantage of discounts for something you really need. If you intend to apply for a credit card, do bear in mind that each one differs in terms of interest rates offered, fees, rewards and grace period on purchases.

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Different companies offer different incentives and promotional rates to lure customers into signing up for their credit cards. How do you choose a card that is just right for you?

First of all, ask yourself if the card offers benefits that suit your lifestyle. Do you like to shop and eat out? Are you a frequent traveller? Is building good credit important to you? Are you conscious about how you spend your money, but need a card for certain purchases? Are cash back rewards important to you? Whatever your reason for getting a card, there should be one that works with you to meet your needs.

Use the decision factors below as a guide:

1. Decide how you’re going to use the credit card

Different credit cards offer different terms and benefits for different purposes. If you can’t pay the balance in full each month, select a card that offers a low interest rate to save on interest. On the other hand, you could look for a card that offers longer grace periods such as 55 interest-free days, to give you ample time to pay in full. If you plan to book frequent flights on your credit card, look for one that has frequent flier miles. Knowing exactly what you’re looking for will narrow the options in the selection process.

2. Credit card comparison time!

If you’re swarmed with credit card offers through internet advertisements, junk mails and brochure hand-outs, don’t be overwhelmed by them and make impulsive decisions to sign up. Compare each one to see which offers the best deal for your needs.  Comparison websites such as www.creditcardoffers.com.au and www.creditcardfinder.com.au are useful resources that may assist you in finding the best deals. Such sites give you instant details on various cards at a glance.

3. Check the interest rate

Interest rate charged on outstanding balance

One of the primary factors you should consider when selecting a credit card is the interest rate.  Lower interest rates mean you pay lower finance charges, the fee charged whenever you carry a balance beyond the grace period. Lower interest rates are typically given to applicants that have better credit scores. So you will qualify for this benefit if you have healthy credit ratings.

Other interest rates

Credit cards can have several interest rates – one for purchases, one for balance transfers, and one for cash advances. Interest rates for balance transfers and cash advances are usually higher, unless you’ve signed up for a promotional offer. Check for the lowest interest rates on the types of balances you plan to use.

4. Look out for annual fees.

Most credit cards charge an annual fee; it’s one of the ways banks make money from credit cards. Ideally, you’d want to completely avoid credit card fees unless the company offers other benefits you’ll take advantage of that make the fee worth it. If you can accumulate more rewards than your annual fee costs, it is then worth signing up for the card. If you don’t shop a lot and thus don’t qualify for rewards, it is best to sign up for card without an annual fee.

5. Be aware of the grace period

The grace period on a credit card is the amount of time you have to pay a balance in full to avoid a finance charge. Longer grace periods are better if you plan to pay your balance off each month, because more time is provided for you to accumulate cash to pay off your balance.

6. Rewards offers

Reward cards benefit those who do lots of shopping on necessary items such as children’s clothes, groceries for the family, or household items. Such cards either offer reward points, or give you cash back as a reward.

For example, if you use a card that offers cash back at a supermarket for your weekly grocery shopping, then you could make some savings on your shopping just by using your reward card. On the other hand, the points accumulated on a reward card can be traded for family vacations and restaurant or merchandise vouchers. In addition, other cards take a percentage off your bill balance as a cash back reward. Since these types of cards reward you for necessary purchases that you are making, you tend to gain by signing up for such cards.

7. World Traveller Benefits

If you are a frequent traveller, it is best to look for a card with the following features:

  • Low currency conversion rates and foreign transaction fees
    This means that when you make purchases in a foreign currency using a card with low rates and fees, you won’t be charged a lot to automatically convert purchases into Australian Dollars for your bill.
  • Points for travel
    You may consider signing up for a Frequent Flyer credit card that pays you for travel, such as offering you a mile for each dollar spent. This enables frequent flyers to accumulate credits based on the number of miles flown which can then count towards future flights, or completely pay for them.

8. Be informed about the credit limit

The credit limit is the maximum amount you can charge on your credit card without receiving a penalty. Some cards offer a $5000 credit limit, while others offer much higher limits such as $10000 or more. Exceeding your credit limit can result in a higher interest rate, since you’ve defaulted on the terms of your credit card agreement. If you need to make big item purchases, look for a credit card that has a high credit limit. One thing to note is that your credit score could be affected if your balance exceeds 10% of your credit limit.

9. Consider a balance transfer

Credit cards offering balance transfer services allow you to transfer your existing credit card debt over to a lower interest card provided by another lender. Sometimes the lender may offer an interest free period as an incentive to switch providers. The debt consolidation process onto one card could benefit anyone with outstanding balances on several credit cards. This makes it easier to keep track of monthly repayments. Moreover, you will pay less interest on your balance, at least for a certain period of time. This means that instead of paying the high interest rates, more of your monthly repayments will go to paying off the actual debt. Check the transfer fee charged by the existing lender — which can be anything up to 5% of the balance transferred — before you consider transferring your balance.

10. Pay attention to the fine print

It is a standard procedure for credit cards companies to provide you with information about their credit cards whenever they send an offer, to help you pick the best card for you. This includes:

  • the annual percentage rate for all types of balances
  • the penalty rate and the instances in which the penalty rate applies
  • any variable interest rate information
  • the grace period
  • the finance charge calculation method
  • the annual fee, if any
  • the minimum finance charge
  • fees, like cash advance fees, balance transfer fees, late payment fees, and over-the-limit fees

Credit cards can be a great personal finance tool if used wisely. It’s imperative that you choose the right card for your specific needs. In this regard, you should make sure you have the right reasons for applying before deciding on the right card. Thoroughly review the terms and conditions of credit cards you’re interested in to make sure they serve your purpose, and look at all the applicable features to help you select the right credit card that works best for you.

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2 thoughts on “10 Tips on Choosing the Right Credit Card”

  1. That’s a great point about considering what you’re going to use the credit card for (carry a balance or pay in full). My guess is that most credit cards don’t offer low interest and an execptional rewards program. But…it would definately make sense that a credit card might charge a higher interest rates to card members, but reward them with more lucrative “points” programs.

  2. I agree with Benjamin – I used to look only at interest rates whenever I compared credit cards. I also made the mistake of looking for the cheapest premiums when I did my car insurance comparison! Never again. In future, I’ll take a closer look at the benefits and rewards, as well as the costs.

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