What Makes for a Good Credit Card?

The “Complete Credit Card List” (found at http://www.indexcreditcards.com/) lists over 1500 credit cards. While an impressive database, it is far from complete. For starters, it doesn’t list our credit card, or any other credit cards from smaller institutions. Even this conservative number presents a staggering array of options. Which credit card is right for you? While there are a variety of personal factors that will influence your decision, there are some general guidelines that will significantly restrict the list from which you choose. After all, with so many credit cards out there, there are sure to be some winners and some, well, stragglers.

So, what makes a good credit card? All the information you’ll need can be found in your credit offer. Here’s what we recommend you look out for:

1. No Annual Fee – In the last year, the percentage of bank credit cards with annual fees rose from 14% to 21%, and the fee amount stood at a median of $59. Even if your annual fee falls below this median, it’s a cost that may well stay with you for the life of your credit card. The longer you hold credit cards, the better your credit score will be, but you shouldn’t have to pay a premium to take out and maintain credit. For some people with damaged credit, it may seem like your options are limited. However, there are a lot of credit cards that do not require annual fees.

2. Low Interest Rate – It’s a good idea to know your credit score before looking for a credit card. That way, you’ll have a good sense of the interest rate that will be available to you before you apply for the credit card. Clearly, the lower the better, but if you are offered a credit card with an interest rate of higher than 15%, run away! If you have been rejected from every other credit card, take some time to learn more about credit and build your credit through a secured loan or some cheaper form of credit. At 15% interest, your balance is rising at 1.25% every month. That means that on a $10,000 balance, you’re spending $125 on interest alone.

3. No Balance Transfer Fee – If you’re looking to switch your credit card debt to a new, better carrier, the first sign of a questionable credit card is a transfer fee. Many offers will stipulate anywhere from 3-5% fee for transferring money. That means that if you transfer $10,000, you can pay as much as $500 on fees alone! Many credit cards with 0% Introductory APRs will rely on this as a source of income in the first year. Even some credit cards without a 0% interest APR will do this, meaning that it can take you a few months just to break even!

4. No or Low Cash Advance Fee – If you can avoid it, don’t take out a cash advance on a credit card. If for no other reason, it encourages overspending. Be cautious of fees when there is a set fee for each cash advance and a higher interest rate on cash advance purchases. If there’s a $30 cash advance fee and you take out $200, and the interest rate on cash advances is 19.9%, you are frequently going to pay that on $230, not just $200. Look for cards that offer low fees and no separate, higher interest rate, or that offer no fees with only a slightly higher interest rate. If you’re in a tight spot, there’s no need to dig a deeper hole!

5. Locally Owned by your Institution – A good credit card is owned by your institution, not farmed out to a credit card company. Some credit cards are branded with a bank’s name, but have no other connection. In these instances, the bank simply collects a profit for getting someone to purchase a credit card. The same can be said for store cards, which are almost certainly not owned by an institution. When you run into a problem, a financial institution with whom you’ve built a relationship is far more likely to help you than a credit card company that deals in volume. Don’t forget to search locally, as small banks and credit unions often keep their credit card portfolio in house, and the credit card processor(s) and service representatives are usually a lot more accessible.

6. No Penalty Default Rates – New laws have restricted the penalty default rates, so that a consumer must be given 45 days worth of notice before it takes effect, and it can only be applied to new balances. Existing balances can only have interest rates changed after a 60 day delinquency, followed by a 45 day notice. Still, if you pay late, does that mean your rate will rise dramatically in 45 days? That still means you’re either paying more or going hunting for a new credit card if your issuer can’t be persuaded to change their mind. (It is always worth it to check, though). That’s a hassle you don’t need. An ideal card lacks penalty default rates.

7. Overall Lower Fees than Average – Thanks to the new credit card laws, late fees have dropped from an average of $39 in March 2010 to a range of $25-35 in January 2011. Credit cards that fall below or are at the lower end of this range are keepers. Also new with the credit card reform law, over-limit fees are only applicable if you allow over-limit spending on your credit card, and many credit card issuers offer very low, or no over-limit fees.

Comparing two or three credit offers should give you a better idea of what variety is out there regarding credit card agreements. If you take the time to look carefully and explore your options, you can save a lot of money with a good credit card. For more information, check out our Understanding Credit workshops, available monthly at our Northampton and Hadley locations, and bi-monthly in Worcester.