Understanding Credit Cards

With so many credit cards choices available today, it’s no wonder that consumers don’t have the time to decipher the differences in their options.  There are even, often times, over five options from one company.  So, let’s take a minute to talk about some of the things you should consider.

First things first, do you want to pay an annual fee?  There is one huge benefit of no annual fee credit cards and that is the ability to maintain credit at no cost.  Sounds like a no brainer, right?  Well, it’s not as simple as “free is better than paying”.

Most of us are well aware that a negative credit report or a low credit score can ruin our chances for many of the milestones we want to reach in life; a new car, a college education, a new home, and sometimes even employment.

Creditors look at many things to determine whether or not consumers qualify for credit cards and loans, as well as what interest rate that credit card or loan will be assigned. The criteria includes, of course, how well you manage your credit as well as your debt-to-credit ratio.  Both of these criteria require that you have a credit history that the creditor can evaluate.  And, often times, no credit is almost as detrimental as poor credit.

So, the biggest benefit of no annual fee credit cards is the ability to maintain credit at no cost.  Otherwise, you would be paying, for example, $30 annually just to maintain your card.  Another good point to add is that often times, if we pay this annual fee and don’t use our credit card often enough, we may feel compelled to close the account to avoid the fee.  In actuality, it’s recommended that you keep your account open even if you aren’t using it.  The account being open means you have that credit available to you, thereby improving your debt-to-credit ratio.

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If you’d like to find an estimate of your debt-to-credit ratio, divide your debt used by
your available credit.

Use this as an example:

John has $1250 of debt charged on Credit Card X.

Credit Card X has a $2500 limit.

$1250/$2500=a debt to credit ratio of 50%.

To put it simply, you want, at the very least to have a debt-to-credit ratio of less
than 50%.  And some creditors even look for a ratio of 35%!
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With all of that being said, we were always taught to “never say never”, right?  So, when is it appropriate to pay an annual fee?

If you plan on using your card on a regular basis, paying a lower interest rate is always preferred.  Choosing a card with an annual fee and a lower interest rate is preferred if the only alternative is a no-annual fee card with a higher interest rate.  Another situation in which you may want to pay an annual fee is when the card with the fee has greater rewards that you would actually use, than a card with lesser rewards or rewards that don’t benefit you.  For example, if you’re a frequent flyer and a card with a fee rewards you with three miles for every dollar spent, but a no-fee card only rewards you with one mile per dollar spent, then obviously paying a small fee is to your benefit.

All-in-all, there are quite a few factors to consider when selecting which credit card is best for you.  But, if you evaluate fees, interest rates, rewards, and penalties, you should have of the information you need to pick the card that best fits your lifestyle.

With the right credit card and good usage habits, you can enjoy increased spending power, add another emergency financial resource, reap rewards, and boost your credit score all at the same time!