USING CREDIT WISELY
by
Charles Lamson
Does it seem that every week there is at least one new credit card application in your mailbox? Well, there's a very good reason for that, because each year, the 20,000 or so institutions and organizations that issue these cards mail out over 3 billion credit card applications! Everyone of these unsolicited pieces of junk mail try to give the impression that their offer is better than all the rest. It is very easy to be overwhelmed by all these choices. And although we've discussed in earlier posts how credit cards and revolving lines of credit can simplify your life financially, you can get into trouble unless you use them wisely. That is why you should carefully shop around to choose the right credit cards for your personal situation, understand the advantages and disadvantages that credit cards present, know how to resolve credit problems, and how to avoid the ultimate cost of credit abuse---bankruptcy.
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Shop Around for the Best Deal
They say it pays to shop around, and when it comes to credit cards, that adage certainly holds true. With all the fees and high interest costs, it pays to get the best deal possible. So, where do you start? Most credit experts suggest the first thing you should do is step back and take a look at yourself. What kind of "spender" are you, and how do you pay your bills? The fact is, no single credit card is right for everyone. If you pay off your card balance each month, you will want a card that is different from the one that is right for someone who carries a credit balance from month to month and may only pay the minimum due.
Regardless of which category you fall into, there are basically four card features to look for:
Now, if you normally pay your account balance in full each month, get a card with no annual fees and a long grace period. The rate of interest on the card is really irrelevant, since you do not carry account balances from month to month anyway.
In sharp contrast, if you do not pay your account in full, then look for cards that charge a low rate of interest on unpaid balances. The length of the grace period is not all that important here, but obviously, other things being equal, you are putting off with low (or no) annual fees. Sometimes, however, "other things aren't equal," in which case you have to decide between interest rates and annual fees. If you are not a big spender and do not build up big balances on your credit card (i.e., the card balance rarely goes above $400 or $500), then avoid cards with annual fees and get one with as low a rate of interest as possible. On the other hand, if you do carry big balances (say, $1,000 or more), then you will probably be better off paying an annual fee (even a relatively high one) to keep the rate of interest on the card as low as possible. For example, with a $2,000 average balance, your total yearly finance charges (including annual fees) will be less with a card that has, say, a $50 annual fee and an interest rate of 15 percent than one which has no annual fee but charges a higher (19 percent) rate of interest.
The bottom line is---do not take the first credit card that comes along. Instead, get the one that is right for you. To do that, learn as much as you can about the credit cards you've been offered or are considering. Be sure to read the credit agreement carefully and look for information about annual fees, grace periods, interest rates, and how finance charges are calculated. And do not overlook all those other charges and fees you may get socked with if you are ever late with a payment or go over your credit limit; not that you are going to make it a habit of doing these things, but just in case. Also, if the local deals aren't all that great, you might want to consider cards that are offered nationally. Many banks market their cards throughout the United States, and it may pay to check them out. To help you do that, look to publications like Money magazine and Kiplinger's Personal Finance magazine. They have Internet sites located at www.money.com and www.kiplinger.com, respectively. These magazines and Internet sites regularly publish information about banks and other financial institutions that offer low-cost credit cards nationally.
One final point: Some people, it seems, spend a lot of time and energy shopping for deals, jumping from one card to another to take advantage of low introductory rates. Although a strategy like this may result in lower payments, it can backfire if the low rates significantly rise after the introductory period, or if you miss a payment. A wiser approach is to shop around, check for better deals from time to time, and then direct the rest of your energy toward working to reduce (or even eliminate) any monthly balances.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 260-261*
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