The following is Part One of a two-part series on credit cards, written by my good friend Fred. Fred is a personal finance writer for CredtCardFinder. He helps people compare balance transfer credit cards and no fee credit cards online.
Before you can choose the credit card which is right for you, you need to choose the type of credit card you need. There are different credit cards available for different spending habits, purchase volumes and financial needs, so before you apply for a new credit card, find out what it means to choose a balance transfer credit card, a low interest credit card, one with no annual fee, or a gold or platinum credit card.
Balance Transfer Credit Card
A balance transfer credit card allows you to transfer the balance from a high interest rate credit card, to a special offer of a low and sometimes 0% interest rate card. A balance transfer offer is usually only available if you are transferring a balance from a credit card from a different provider and unless you specifically choose a for life balance transfer, you will have to repay your balance within the transfer period, before it reverts to a higher rate.
Advantages of a balance transfer credit card:
- Low or no interest. Where your standard credit card will be charging you an interest rate in the high teens, or even as much as 20.00% a balance transfer card will offer you a low single digit interest rate, and in some cases even a 0% interest rate. This gives you a better chance at repaying your credit card balance, because more of your payments can go towards your principal balance, rather than to interest charges.
- Time to repay your debt. A balance transfer offer can give you anywhere from six months, to the life of the balance to enjoy a low interest rate on your debt. Therefore, if you have a smaller debt, choose a shorter balance transfer period, if you need more time, look for a nine or 12 month offer, or even a for life offer.
- You can transfer your balance to a new offer. When you transfer your balance to a balance transfer card, you are not locked into a contract. This means that if you need more time to repay your balance but your offer is about to expire, look for a new balance transfer offer and make the switch.
Disadvantages of a balance transfer credit card:
- You will be charged the cash advance rate at the end of the offer. Unless you have chosen a for life balance transfer, your low interest rate will expire. When it does, it will often revert to the card’s cash advance rate, which can mean your balance is earning around 20.00% interest again.
- If you spend on the card you’ll be charged interest. Any new purchases you make on your balance transfer card will not qualify for the low promotional rate, plus, they will not be repaid until your older balance transfer amount has been paid off. This means that your purchases will be earning a higher rate of interest, undoing all the hard work you’ve done to focus your repayments to reducing your balance while it is earning less interest.
- It’s easy to get used to a low interest rate. When you have the pressure of a high interest rate credit card released, it can be easy to become lazy in your commitment to clearing your debt. You may be tempted to make the same repayments you were making before without adding more to pay off your balance faster, and you won’t really learn any important lessons about managing your debt.
Low Interest Rate Credit Cards
Not all cards offer high interest rates in their 20s, some cards will offer an ongoing low interest rate and these are best suited to people who have trouble paying their balance down to zero each month, so that even if you do attract interest, it isn’t insurmountable.
Advantages of low rate credit cards:
- It’s easier to control your debt. If the spending on your credit card does get away from you and you realise you can’t pay off your purchases in one monthly payment from your wages, you don’t have to worry that your balance will remain out of control. The hardest things about reigning in a credit card balance are the amounts you have to pay on top of your original purchases, putting you even further behind. However, with a low rate chard, those extra interest charges aren’t a large percentage of your original purchases.
- Suited to credit card holders who rollover their balances. If you regularly rollover a credit card balance from one month to the next because you often need to wait for more funds to come in, or other bills are a priority, you don’t have to worry as much about being charged interest on your purchases.
- Often comes with a lower annual fee too. A low rate credit card is often part of an affordable credit card bundle, so where some credit cards can have annual fees in excess of three or four hundred dollars, you should be able to find a low interest credit card with a fee less than one hundred.
Disadvantages of a low interest rate credit card:
- You won’t always find interest free days on offer. Since the interest rate is already low, not all credit card providers will give you the opportunity to avoid it all together.
- Fewer rewards. In exchange for a low interest rate, you may have to give up some additional card features like rewards programs or discount or cash back offers. This can in turn become an advantage, since you’re not tempted to spend on your card just to qualify for the rewards programs.
- Even a low interest rate adds up. If you regularly rollover your credit card balance, a low rate card can help you manage your repayments more easily, but it is not always going to help you form better credit and spending habits. It can be easy to not worry about your balance for months on end because it is only earning a low interest rate, but even low interest charges can add up over time.
We will continue with the rest of the categories early next week.
When comparing the types of credit cards available, understanding what all the options mean, can help you discard those cards which don’t suit your needs. You can also take advantage of great offers you didn’t even know existed, but which can help you control your finances and be rewarded at the same time.
As always, your comments and suggestions are greatly appreciated below.
{ 1 trackback }
Comments on this entry are closed.