Cash is scary. You have no protection if you lose it. It’s an easy target for theft. It gets damp and wadded up in your pocket, and if you forget to go through your pockets, it ends up going through the wash.
For many people, the answer has been to carry a debit card. When you carry a debit card, you’re really carrying around your entire checking account in your pocket. You’re vulnerable to theft, fraud and other nasty consequences.
Carrying a credit card can protect you from much of those troubles. In addition to being accepted in more places, credit cards have fraud liability protection built into them. You’re only liable for a portion of the total loss. Depending on your credit card, you might not be liable for any of the fraudulent activity on your account.
Compare that to a debit card, where a fraudulently obtained number can be used to clean out your checking account and hit you with overdraft fees. Most financial institutions will replace the money that’s been taken from you, but they don’t always do so immediately. This can leave you in hot water if you have automatic bill payments set up or major expenses, like rent or a car payment, due in the near future.
Not only that, but carrying a credit card (and using it responsibly) can help build your credit score. Even having a card “for emergencies” can help provide you with peace of mind. There’s no security downside either. Every security feature in your debit card is also built into your credit card.
Knowing that a credit card is right for you doesn’t tell you which credit card is right for you, though. With so many of them out there, it can be difficult to sort out what’s relevant from a sales pitch. Here are a few important points to focus on when considering your options. You want to pick a card that gets you the features you want while paying as little as possible for it.
1. No annual fee
The convenience of a credit card is a fantastic option, but it’s hard to justify paying a ton for it. Fees can sometimes be as high as $500. These are charged automatically to your card. If you’re not paying attention, they can put you over your credit limit or leave you with a balance and unexpected payment coming due. Find a card with no annual fee to avoid these risks.
If your card does have an annual fee, there are a number of ways you can get out of it. Some cards will waive the annual fee if you charge a certain amount each year. Others may let you out of paying the fee if you call and threaten to cancel. Choosing a card with no annual fee is the best first option, but there are ways to avoid the fee.
Conventional wisdom says you should choose a card that offers a competitive rewards program. That way, you can charge everything to that card for maximizing your rewards potential. If you pay off the balance in full each month, you get all of the upside without the potential risks.
There are a couple of reasons why this might not be an effective strategy any longer though. First, rewards are shrinking. Credit card companies are offering less, and retailers and airlines are increasingly unwilling to pick up the slack. Second, rewards programs expiration dates may encourage you to spend recklessly. Knowing that you have three weeks to accumulate enough rewards to cash out at a reasonable level might encourage you to splurge. Third, paying for everything with debt can put you in a terrible position if something unfortunate happens. If you lose your job or don’t have enough cash to pay the balance in full every month, you could be staring down a significant finance charge.
Rewards programs are nice, but they shouldn’t be a deciding factor in picking your credit card. Treat your rewards credit card like a bonus, but don’t plan your financial habits around it. You might get a few gift cards you can use for a nice perk every now and again, but you’ll save money if you focus on less costly credit cards.
3. Low financing fees
This is the most important factor in choosing between cards. You want to find the lowest cost for your credit services. This is made of two factors: grace periods and APR.
A grace period is a time between a charge and interest accumulation. On average, these are between 28 and 30 days. This gives you time to pay the balance without being charged any interest.
APR is the interest rate. This is the percentage of the balance that will be added to your bill each month. They are usually fairly high, running between 17% and 27%. It’s expensive, but you can keep it low by paying your credit card off in full each month.
You want a lengthy grace period and a low interest rate. These two factors are critical to getting the convenience and security of a credit card without paying too much for it. Shop around for a credit card that gives you time to pay it off and avoid interest. A low interest rate for instances when you can’t pay it in full would then complete the package.