Best credit card
A credit card is a bit like a chain saw — it’s a very handy tool, but it’s capable of inflicting horrendous damage if used improperly. The same advice applies to both of them — choose the right tool for the job, and follow the safety rules.
Checklist of what to look out for when choosing a credit card
Here’s a checklist of some things to look at when you choose a credit card:
- Annual Percentage Rate (APR). This is the cost of borrowing on the card, if you don’t pay the whole balance off each month. You can compare the APR for different cards which will help you to choose the cheapest. You should also compare other things about the cards, for example, fees, charges and incentives
- Minimum repayment. If you don’t pay off the balance each month, you will be asked to repay a minimum amount. This is typically around 3% of the balance due or £5, whichever is higher
- Annual fee. Some cards charge a fee each year for use of the card. The fee is added to the amount due and you will have to pay interest on the fee as well as on your spending, unless you pay it in full
- Charges. Check in the credit agreement what other charges apply to the card. You will usually be charged for going over your credit limit, for using the card abroad and for late payments
- Introductory interest rates. This is where you start off paying a low rate of interest or none at all. The rate then increases after a certain amount of time. For example, it could increase after six months or from a certain date. You’ll often see an introductory rate for balance transfers. If you are comparing cards, look at how long the introductory rate lasts as well as the interest rate it changes to at the end of the introductory period
- Loyalty points or rewards. The points add up depending on the amount you spend and you can then use them to buy goods. Sometimes this is in particular shops. Check how and where the rewards can be used and think about how likely you are to use them
- Cash back. This is where you get money refunded to your card, depending on how much you spend. Check that you are likely to qualify for the cash back. For example, it may only apply if you pay your balance in full each month. A lower interest rate may be a better deal.
- Spending habits.Even before you choose a card, the first question to be answered is how you intend to use it. Are you the kind of person who will pay off the card every month without fail, or do you anticipate carrying a balance from month to month? Are you going to use it to pay for everything, or just for emergencies?.If you’re going to pay the bill in full every month, then the interest rate doesn’t really matter to you. Look for the best card with no annual fee and a longer grace period so you don’t get hit with a finance charge.If you’re going to carry a balance, you want the lowest possible interest rate and a low introductory rate.If this is going to be your go-to-card for most of what you buy, look for a card with a generous credit limit and a solid rewards program.If it’s only going to be used for emergencies, go for a no-frills card with a great low interest rate and low fees.
- The interest rate.On a credit card offer, the interest rate appears as the APR, or annual percentage rate. It can either be a fixed rate or a variable rate that is tied to another financial indicator, most commonly the prime rate. With a fixed-rate card, you know what the interest rate will be from month to month; a card with a variable rate can fluctuate.
- Credit limit.This is the amount of money that the credit card issuer is willing to let you borrow. Depending on your credit history, it could be anything from a few hundred dollars to tens of thousands of dollars. You don’t want a situation in which you’re close to maxing out your credit limit. It can hurt your credit score — and some credit card issuers have cut customers’ credit limits to an amount that’s lower than their current balance. Adding insult to injury, there’s a penalty when that happens.
- Balance computation method.If you’re going to carry a balance, you need to consider how the finance charge is calculated. The most common method is average daily balance, which means that the daily balances are added together and then divided by the number of days in the billing cycle. Stay away from credit cards that compute the balance using two billing cycles; this winds up costing you more money in financing fees. There are plenty of cards that don’t use it.
- Incentives.Many card issuers offer reward programs to their customers to induce them to use the card. Assuming you’re going to make the purchases anyway and the card issuer doesn’t charge extra for the rewards program ,it can be a nice benefit. Look for a program that offers flexibility, such as cash or travel, and rewards you’ll actually use, that are easily earned and redeemed, says Diana Don, director of financial education for card issuer capital one.