How to Choose the Right Credit Card

Most people, at some point in their life, will find themselves looking for a credit card. If you have done your research you have likely discovered that finding the best credit card is not an easy or quick decision to make. Due to the abundance of credit card products available, the final decision can be scientific in nature. Patience is a definite necessity.  Here are some thoughts on how to choose the right credit card.

No single credit card is better than all others in all categories, or for all people.  However, understanding your numerous options and asking the right questions (or knowing where to look for the right answers) you should be able to find the credit card that best fits your spending habits, lifestyle and credit situation.

Before we discuss how to choose the right card, it is important that you know how credit works.  It is much more complex than just simply borrowing on credit:

• You can use a credit card to pay for goods or services at a cash register or checkout which is referred to as a point of sale.
• Over the phone.
• Online

Credit cards also provide the convenience of:

• Cash advances. This is a very expensive way to borrow because of cash advance fees.
• Cash-like transactions in the form of wire transfers, money orders, etc.
• Credit card cheques. These are used the same way you would with personal cheques, however you’ll pay interest from the day you use the cheque.
• Balance transfers. Typically used to pay off the balance from your current credit card by transferring it to a new card that would have a lower interest rate.

With Convenience There Is Always a Price

The price is the interest that is charged for the convenience of using a credit card. Interest is the money you will be required to pay if you don’t pay your credit card balance in full by the due date. You’ll continue to pay interest until you pay your balance back in full.

Federally regulated financial institutions such as banks must provide a minimum 21-day grace period.

Fees and penalties vary depending on the type of credit card transaction and the financial institution. It is very important to read and understand your credit card agreement carefully. Subsequent to the original agreement, they will occasionally change the terms and conditions. This will have to be read carefully too, and if it is something you don’t understand, then ask the financial institution. It is up to you to do the homework.

It is advisable that before you apply for a credit card, check your credit report. Equifax and TransUnion provide credit scores. The better your score, the greater your chance of being approved for cards with better perks.

You Are Now Ready to Choose a Credit Card

The key differences between credit cards are:

• The interest rates
• The fees
• The rewards and benefits

1. Compare credit card interest rates. This may be an important factor if you carry a balance regularly. The higher the interest rate, the more interest you will pay on an outstanding balance.

2. Know your fees. Many credit cards charge an annual fee, whether it is a high interest or low interest card. Even if there is a fee, a low interest rate card may be a better option. Be very careful about credit card introductory offers with low interest rates, as these low interest rates are usually for a limited time. Typically it may apply for 6 to 12 months and then rise substantially.

Other fees and charges:

• Cash advance fees
• Foreign currency charges
• Over-the-limit fees
• Printing charges for statements or receipts
• Dishonored payment fees for NSF transactions
• Inactive account fees
• Insurance fees, also known as premiums for credit card balance insurance

3. Compare credit card rewards and benefits.

The same goes for benefits such as car rental insurance. You should calculate what the rental agency charges per day for car insurance versus what your credit card will cover. If you rent a car more than once per year, it could be beneficial to have this benefit.

Cash back rewards, grocery rewards, etc. all should be carefully considered if they are actually a beneficial reward program after subtracting the annual fee which is usually attached to these cards.

Pro tip: To help you establish if a card’s reward program is worthwhile, estimate the potential value of the rewards you may earn in a year and then subtract the annual fee.

Confused yet? There are other cards to consider too, such as:

Specialized Credit Cards

Depending on your credit history and spending habits, a specialized credit card may suit your needs:

Student credit cards. Some financial institutions offer credit cards that are specifically designed for students. These cards generally have lower credit limits and may also have other benefits tailored to students, such as discounts at certain retailers.

Retail credit cards. There are a variety of big box stores that offer these cards. Retailers often offer extended interest-free periods, discounts or reward programs. Be aware that these offerings often apply only to purchases made at the store that issued the card.

Joint credit cards. As a primary cardholder, you may add and remove additional cardholders and authorized users to your card at any time. It is very important that as the primary holder, you are responsible for paying your credit card balance.  This includes the purchases made by the joint holder.  Know them well.

Secured credit cards. This is a type of card that requires you to provide a security deposit to the financial institution who issues the credit card. Depending on the credit limit you request, the security deposit may range from a few hundred to a few thousand. You may want to consider this type of card for the following reasons:

• You are a newcomer to Canada and have no credit history
• You have filed for Bankruptcy in the past
• You wish to rebuild your credit score

If you choose this type of card, you should be aware that you may have to pay a one-time application or set-up fee, which isn’t part of your security deposit. This card may also have an annual fee. It is best to check with your financial institution for the exact particulars.  Note that in order to cancel a secured credit card, you will need to pay off the entire balance. Once the account is closed, your security deposit is given back to you.

There is an abundance of information on the internet to pursue. A popular website which may be of assistance is Moneysense.

What’s Next After You Have Found the Best Credit Card for Your Needs?

Choosing the best credit card is an important decision. It is important to be responsible and use your credit the right way to get the most for your money.

If you are trying to establish credit, pay your bill in full every month and don’t use too much of your available credit. It is best if you can pay off the full balance every month to avoid interest. But wait for your statement to arrive before you pay the balance.

If you are trying to achieve reward points, use your credit card for everyday purchases and ensure you pay your bill in full every month.

Have the credit card working for you. Use it as a convenience and not a form of financing. The credit card you choose should help you achieve your financial goals in the most efficient, affordable way possible.

We always recommend that you have only one credit card and commit to paying it off in full each month. Avoid having multiple credit cards.

Getting a Credit Card After a Bankruptcy

If you have had a Bankruptcy in your past, or are considering applying for Bankruptcy protection now, it is important to know that life will go on and a credit card will be available in your future.

In fact, we are aware of people having credit card type products pushed at them immediately after a Bankruptcy has started; Congratulations, you are pre approved! We recommend that you politely decline that offer so that you can do some research as outlined above.

Future credit will be a function of what your cash flow and employment situation is and will vary from person to person.

Contact Us

If you are in a situation where you have accumulated an unmanageable amount of credit card debt, and other unsecured debt such as a line of credit, overdraft balance, etc please contact us at Chase & Associates.  We are a CPA firm that has people licensed and approved by the Federal Government as Licensed Insolvency Trustees (LITs).

We offer a free confidential meeting, where we will take a look at your financial situation and provide you with feedback including what options might be available to you.  Contact one of our convenient locations to make an appointment that fits your schedule. You will be glad you did!