Choosing and Using Credit Cards
December 28, 2008 – 2:20 pmWelcome back!
Credit cards can be a big convenience. You can charge a purchase when you don’t have the cash and don’t want to pay by check. Many credit cards also let you pay off purchases over time. Indeed, fully 70% of the nation’s 100 million cardholders carry balances from month to month. Like snowflakes, however, no two cards are exactly alike. And the cards you’re holding right now may not be the best ones for you. Odds are you probably own more cards than you need. So here’s a short course in how to choose and use credit cards.
The first thing to know is the difference between credit cards and travel and entertainment cards. Credit cards, like Visa, MasterCard, department store cards, and gasoline cards, let you make monthly payments of less than the amount you’ve charged. But you’ll pay interest on you unpaid balance, perhaps as much as 18% to 21%. You may be surprised to learn that Visa and MasterCard are umbrella organizations comprising independent financial institutions that issue so-called bank cards and set their own terms for borrowers. So the Visa card from the bank on the corner could be much different from the one issued by the bank across town. Generally, there are bank credit cards with high interest rates but no or low annual fees and bank cards with high annual fees but low interest rates. If you tend to carry a balance, you’ll want to look for a card with a low interest rate. If you never or rarely carry a balance, look for a card with no annual fee, possibly one that offers a bonus or perk for every dollar you charge.
Many credit-card issuers offer so-called gold cards, which typically come with higher credit limits, higher annual fees, and extras like free traveler’s checks and purchase-protection insurance. The additional cost of a gold is probably not justified unless you expect to use the card’s extra service, such as discounts on selected hotels and rental cars. If an issuer offers you these perks on a card with a low interest rate and a low or no annual fee, however, don’t hesitate to go for the gold.
In addition to financing purchases, you can also use a Visa or MasterCard to get a loan in a flash. You can go inside a bank to get a $200 to $500 credit-card cash advance, or get the same advance through many automated teller machines, for a fee of 2% to 4% of the amount you’re taking out (minimum fee: $2 to $5). It’s best to take out a cash advance only when you’re truly desperate for quick dough, though, since the cost of this type of borrowing is so high. Furthermore, you’ll probably owe the credit card’s standard interest rate from the day you take out the cash advance. According to BankCard Holders of America, a non-profit group in Salem, Va., someone who takes a $300 cash advance and pays a $2.50 cash advance fee and one month’s interest at 18.5% will pay an effective interest rate of 32.94%!
Travel and entertainment cards, like American Express, Diner’s Club, and Carte Blanche, require you to pay your entire balance every month. As a result, you don’t owe interest on these cards unless you’re late with your payments. They typically have no present credit limit and charge an annual fee of $55 to $300. American Express sells three types of cards: green ($55 a year), gold ($75), and platinum ($300). The gold card offers access to a 24-hour travel service and sends you a summary of charges at the end of the year. The platinum card, available to wealthy people, gives you free traveler’s checks, free air miles in American Express’s Membership Miles program, and memberships in both the Hertz #1 Club and the Northwest Airlines World Club. Although you can’t get a cash advance against the American Express card, you can use the card to get cash from a bank account at an ATM machine that accepts American Express cards. Green-card holders can use their cards to get up to $1,000 every seven days; gold-card holders can take out as much as $2,500 every seven days; and platinum-card holders can withdraw up to $10,000 every 30 days.
Are travel and entertainment cards worth their relatively steep annual fees? Probably not, unless you think you’ll use a lot of their perks or can’t live with your credit cards’ predetermined spending limits. These days most merchants that accept plastic honor all the major brands. In fact, Visa and MasterCard are accepted at three times as many locations as American Express, which is isn’t as widely recognized outside the United States.
Next topic will be about Debit Cards.
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6 Responses to “Choosing and Using Credit Cards”
If you enjoy entertainment and can enjoy the perks than the American Express is worth it. I used my dad’s to help get advanced concert tickets from an American Express concierge. It was great.
By
Craig (Who am I?) on Dec 29, 2008
It’s crazy what credit card companies are doing now. Lower limits and higher interest rates. I am just going to get a payday loan when I need some quick cash, atleast I know there are no hidden fees and everything is upfront.
By
Cash Advance (Who am I?) on Jan 2, 2009