The following are some best practices for consumers who are new to credit cards. This is, by no means, meant to be an exhaustive list of do’s and don’ts. But, these will help if you’re breaking in plastic for the first time.
If someone is going to carry a balance then the best card for them is going to be one that A) has the lowest possible interest rate and B) the highest possible credit limit. The lowest “non promotional” rate credit cards are going to be those issued by credit unions. If you’ve got good credit you can still find credit cards issued by credit unions that have rates in the 9% range.
And, if you’ve got really good credit you may qualify for a promotional rate of 0% from large credit card issuers who would like you to transfer a balance onto one of their cards, and you can’t do any better than free money. The reason for the highest credit limits is because credit scores like to see balances that are low relative to the credit limit on the card. Optimally you’d like to maintain a balance to limit ratio, often called “revolving utilization”, to no more than 10%.
If you don’t carry a balance then you shouldn’t worry about interest rates, because you’re not paying interest. For these folks I think a rewards card is the best fit because you’ll be building in a perpetual discount on your purchases in the form of cashback, points, or airline miles. There are many options available and a large number have no annual fees. Just be aware that if you begin revolving balances then you’ll be subsidizing your own rewards.
If you travel a lot then I imagine you spend a lot of time in airports and on airplanes. There are several credit cards that are great for frequent travelers, such as the American Express SkyMiles cards targeted toward Delta Airlines flyers. The highest level card allows for access to Delta’s SkyClubs at airports and also awards you with the type of miles that are used to bump travelers to higher levels of Delta’s Medallion program.
I’m a firm believer that cashback rewards cards are the best deal running for most cardholders seeking rewards cards. Cash has no black out dates and everyone understands the value of a dollar. Not everyone understands the value of an airline mile or a “point.” And, of course, cash can be used to buy the same things you’re earning with other non-cashback rewards cards. Many credit card issuers will offer steep cashback bonus this holiday season, just like they did last year. I also like the few retirement account builder cards still on the market. Fidelity has several of them and it is an easy way to throw a little cash into an IRA.
The 0% offers are better now than I’ve ever seen, and I’ve been around since 1991. If you’ve got killer credit then you’re being wooed with 0% balance transfer offers (with no balance transfer fees), and 0% on purchases. Some of these promotional rates last over a year, which is a great way to free up some extra money at the end of the month to pay down the debt. These are the credit card issuers’ “flight to quality” attempts. Almost every credit card issuer wants these FICO high flyers.
So I’m assuming this is someone who has bad credit. Credit union, credit union, credit union. The big boys don’t want you right now and you don’t want the alternative…the subprime credit card issuer where the rates start in the high 20′s. In fact, you may want to reconsider even getting a credit card right now because the cost of carrying a balance on one of them is absurd. If you’ve got a relationship with a credit union and your credit is bruised instead of broken you may be able to get approved in the teens.
Credit cards can serve many purposes for different people. Whether your credit score is great or terrible, whether your’e an avid traveler, or whether you don’t even carry a credit card balance, seeking an optimal solution for your specific situation can reap a large savings over time.