Kelley Olinger is a Coach/Consultant and the Founder of Reconcile Your Wallet (www.reconcileyourwallet.com), assisting high-achievers to align their personal finances with their personal aspirations. Kelley worked in Residential Real Estate with a focus on pre-construction development for over a decade in Victoria, British Columbia and recently completed her MBA. In this article, she discusses different types of credit cards and suggests questions to ask yourself before getting a new or additional credit card.
3 Questions to Ask Yourself Before Choosing Your Next Card
#1 – What is your level of temptation with credit cards?
The first thing to ask yourself when choosing a credit card or even evaluating credit cards that you already have is, what is your level of temptation? If you notice that the maximum balances offered are far more generous than what you actually need, call the bank and have that limit scaled back. If you’re concerned about overspending, it's best to remove that temptation altogether.
Do you find the higher limit set by the bank tempting? If so, then that control the limit that you set. Look at your history with credit or credit cards. Have you lost control before? What limits did you have? Did the limits exceed what you actually needed? Obviously, if you are truly concerned about overspending, credit cards may not be a good choice at all. Instead, use debit cards or cash if you can.
#2 – What is the purpose of the card?
There are several types of credit cards.
- Balance Transfer Credit Card – This type of card offers to transfer any other credit card balances or loans to this card in return for 0% interest for a specific time period. This can be a phenomenal option, but there is also considerable ‘fine print' detailing financial penalties if you don’t pay the balance due by this 0% interest period.
- Travel Credit Card – This type of card offers points accrued from flight or hotel reservations, and even some insurance perks. If you want to rent a car, you can waive certain types of insurance, depending on your card and on the rental company. One thing to note about Travel Credit Cards… if you are a frequent traveler and use your card internationally, the exchange rate is always a bit higher, given they often charge an average of 2.5% on top of the standard exchange rate. You can also research those cards that have a 0% foreign transaction fee to avoid this surcharge.
- Cash Back Credit Card – This type of card offers the benefit of no annual fee. You can receive a percentage of the total amount spent over time to be credited to the card holder.
Any reward card is best left for those people who are confident that they’re going to pay that balance off each month. If you are spending to accrue points rather than accruing points because you happen to spend, that can really be a dangerous habit. If you are buying items primarily to earn points, you are actually paying to earn those points. Be careful!
- Student Credit Card – This type of card is unique, given its easier application process that takes into account the lower income and lack of credit history of most students. You simply have to prove enrolment in a college or university.
- Low Interest and 0% Credit Card – This type of card is generally offered as part of a short-term promotion. These cards can be beneficial for anyone who is trying to get back on track after accruing debt. Although an interest rate of 19.99% may be normal for some, there are still institutions that offer a 9.99% rate or lower interest cards.
- Secured Credit Card – This type of card is ideal for people who need to rebuild their credit. The bank holds the same amount of cash as they give you in a credit card limit, so it serves as collateral. As you’re using the credit card and it’s being paid, it’s rebuilding your credit.
- Business Credit Card – This type of card is designed to keep business expenditures completely separate from your personal transactions or spending. It makes it far easier to file your taxes if all of your business expenditures are already sorted.
#3 – How much do you plan to spend each month?
This applies mainly to people considering rewards credit cards, or even Secured Credit Cards because you have to pay the collateral upfront to the bank. You need to know how you’re going to spend enough on the card to justify the amount you might have to pay in fees to simply have the card. The cards that have the biggest rewards often charge an annual fee. If you’re a really good bank customer, sometimes you can have those fees waived.
Because spending with credit cards can easily get out of hand, they’re often blamed for rising consumer debt. This can be true, but if you manage your spending and temptation, you can also reap great rewards.
Remember that when balances get out of hand, then interest can be higher, and sometimes people aren’t in a position to even pay the interest down. There are several options available, like moving the balance into a different credit card that offers 0% Balance Transfer, or through consolidation loans just to get the interest rate lower. Reduce the interest rate in whatever way you can. Pay those balances off more than you need to. Pay them off daily, weekly or twice per month so there will be no surprises. Stay in control to remain emotionally and financially healthy.