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How do you pick a credit card?
see317
Registered User regular
Registered User regular
I'll try to keep a moderately long story short here. I'm 35, and have never had a credit card. My credit is in good standing, I've got a mortgage and student loans. I've used debit cards tied to my checking account for any purchases too large for cash but never had an actual credit card.
Late December, my furnace died and had to be replaced. I had the funds to pay for it in my savings account, but it took a pretty fat chunk to replace the unit (it's an AC/Furnace in one unit so both had to be replaced at the same time, ouch). Fortunately, I had enough saved that if I lost my job I'd be good for 7-8 months on those savings, after the furnace replacement I'm down to a month. Frankly, it's pretty frightening to see a safety net evaporate overnight like that. I think that If I had had a credit card, I could have spread that cost out over a few months, and kept most of my savings at the cost of whatever interest the card required. It would have been more expensive, but there's a certain peace of mind that comes from having a safety net for emergencies (like replacing a furnace when it's -4 outside).
So, I'm looking at getting a credit card and it's rather daunting trying to figure it out as a first timer. So, H/A, any help or advice would be hugely appreciated. What cards do you use? Who do you avoid like the plague? What's a good / bad / terrible interest rate? Are there any card perks that I should be looking for or avoiding?
Late December, my furnace died and had to be replaced. I had the funds to pay for it in my savings account, but it took a pretty fat chunk to replace the unit (it's an AC/Furnace in one unit so both had to be replaced at the same time, ouch). Fortunately, I had enough saved that if I lost my job I'd be good for 7-8 months on those savings, after the furnace replacement I'm down to a month. Frankly, it's pretty frightening to see a safety net evaporate overnight like that. I think that If I had had a credit card, I could have spread that cost out over a few months, and kept most of my savings at the cost of whatever interest the card required. It would have been more expensive, but there's a certain peace of mind that comes from having a safety net for emergencies (like replacing a furnace when it's -4 outside).
So, I'm looking at getting a credit card and it's rather daunting trying to figure it out as a first timer. So, H/A, any help or advice would be hugely appreciated. What cards do you use? Who do you avoid like the plague? What's a good / bad / terrible interest rate? Are there any card perks that I should be looking for or avoiding?
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Every few years I might make a large 1-2k purchase on my card, then pay it off 100-200 bucks a month until its empty again. I don't like having any kind of massive debt, so its more for convience and situations like your furnace.
Every month or so your bank will send you some checks you can use that usually will give you like a 6 month interest free on that purchase on your card, so you probably want to hang onto the most recent set of these checks and shred the rest. When a large expense happens, use the check to same money on interest.
Just dont let yourself go crazy. even if you get a large maximum available amount on your card, it never will mean you should use it. I've even asked the bank to reduced the max amount on my cards once or twice just in case of theft or something.
But yeah that's how I'd go about it. Go to the bank, get a card through them. Or shop around online with places like Capital One or BoA. I've had the best luck with capital one though.
Another option might be a HELOC if you've got some equity in your house. They tend to be a lot lower interest than credit cards (2-8% vs 15-25+%). The only issue is they're secured to your home so if you don't pay it, they can put a lien and it gets into nasty stuff.
It's another option and one of the reasons that owning a home is better than renting because of those types of things.
The question is what percs to get and what interest rate if you intend on carrying a debt balance. My family has one with our bank that has a really low interest rate, and one moderately decent one through amazon to pay for our books throughout the year. The amazon one never carries a balance as the only purpose is gas, groceries, and restaurants (which over time typically get us enough points to buy 2-3 kindle books a month). The one through our bank is for everything else and we use the cash back to pay the balance (essentially only paying about 92-98% of the money we spend through it depending on the type of purchase).
Avoid ones offered through retailers (like target), the rates and benefits are crap.
for beginners. some fee cards are pretty appealing but you have to really ring the use out of them to make it pay.
Plus if you have to pay interest occasionally, the rewards program will help take the sting of the interest off a little so long as you make sure you pay them off in a month or two. If you really need money and it seems like it will take longer than three months to pay off, you're better off discussing secured loans with your bank.
The interest rates on a credit card would make doing what you describe a bad approach.
Yes, exactly. If you were in the same situation again with the credit card I would still recommend paying for it in cash out of your savings. Then you still have the credit card for backup and you're not paying extra for it unnecessarily.
Plan on paying off your card in full every month. You really don't want to carry a balance on your credit card. The rates are killer.
You could always pay off the entire card if you needed to, but as long as you are still making that income, stretching it out is making it easier to save money.
A good rule would be never to let your card get over the amount that you could pay off completely with the money you have in the bank at any given time. (probably better to say half that amount).
You dont want your credit card as your backup, you want your bank account as the backup. If you suddenly find yourself unemployed, you want to draw from your bank account, not continue to draw from a credit card and increasing your debt massively through interest rates. at least with a bank account sitting stagnant you are usually earning a tiny amount of interest.
I'd look at:
1) http://thepointsguy.com/credit-cards/
2) http://www.nerdwallet.com/the-best-credit-cards
Or it can be a game, like the post above.
I'm not that intense, but I definitely do game the system when it comes to my rewards.
spoilered for long:
I had to game that a bit by putting some large purchases (lasik, wife needed a work laptop, etc) on it all at once, having my father (with more liquid money than I had available) pay it off, and then me paying him to avoid the 18% interest, but it was worth the hassle for those miles.
This card also let's me transfer all of my miles with no restrictions to my United Travel Rewards account, and charged 95 dollars a year in fees. So to avoid that, I transferred all of my accrued miles to my United account, ended the card, and just kept the bonus miles.
I have another card that gets me a flat 1.5 miles for every purchase, with no interest for 12 months and no annual fee. I put literally everything else on this; internet, netflix, xboxlive, my steam account, amazon, groceries, gas, everything I could. This one also gives me a flat 10% bonus miles annually for having my mortgage through their bank, and a 20% discount in travel when going through their reward site.
I pay all of those off every month before my interest hits, to avoid the high interest payments.
So it just depends on how far you're willing to play.
xbl - HowYouGetAnts
steam - WeAreAllGeth
Yeah, I mean... I pay off my balance every month. With my bank card I had a 0.5% reward rate. I started looking at rewards cards and their sign-up bonuses and I realized I was leaving money on the floor.
To have a card ready for emergencies, find one with the best bonuses, and no fees. Always pay off the full balance every month, and the interst rate is meanginless. That's what I do. I get 1-3% cash back on everything I use my card for, so I use it for all the expenses I have to pay anyway, and basically get a little free money every month.
rent + food + cable/internet/phone/gas/electric and your talking 1600-1800 easy.
plus the other bills like car insurance, fees, regular things you spend money on for entertainment. and budget say 200 bucks a month of that for a CC payment.
So at the end of the month, your lucky if your bank account 'average' amount ends up with an uptick of a few hundred bucks.
Lets also say that at this given time in your life youve accumulated 5k in the bank.
Large unexpected bill comes along of 4k.
Yes, you could pay it off but you would end up with 1k in the bank. a very small amount of savings.
or you could put it on your CC, and pay 200 a month, which stays consistant..yes your paying more over time, but you are not paying more now
Lets assume large unexpected expense number 2 of 2k shows up right after the first.
You dont have the savings to pay it off, and even if you completely empty your bank account to pay off half of it, your still using credit of some kind and now you have no buffer at all and you are reduced to eating raman noodles.
Guy who puts the second expense on the CC, being responsible would increase his monthy payments to maybe 300 or 400 a month, making it tighter for him to spend money on other entertainment, but hes still got his bank account to fall back on in case he loses his job or something.
People as a whole find it easier to pay a set payment each month and fit that into a budget then to take a sudden huge hit to the wallet. The reason CC's are so dangerous and successful is because people dont think about the overall amount all they think about is the monthly bill, which is much smaller. The key is understanding your limits and controlling your spending.
The math behind what you are saying simply doesn't add up. Credit cards DO NOT manufacture more money.
You are only looking at cash on hand. Your overall cash+available credit does not change. The only difference is that you are now not paying interest. If you then have that second expense down the road where you literally do not have cash to cover it, you put THAT on the credit card as a last resort. It's still not ideal, but you are now paying interest on half as much money for less time.
That is exactly what you are doing. Now instead of paying interest only when absolutely necessary, you are accruing interest ALL THE TIME. I don't mean to sound obtuse, but how do you plan to lessen the amount of interest you accrue by accruing extra unnecessary interest? On a side not, interest accrued from a bank account (and most other options really) is insignificant compared to the interest you are paying on credit card debt.
TL;DR
You cannot save money by spending more money. The money is still spent no matter if it's cash that you don't have or a credit card balance. The only difference is the credit card balance costs more in the long term.
Paying for a large bill by putting it on your CC and making small payments amounts to taking out a loan for the amount at 15-30%.
Paying for a large bill out of savings amounts to taking out a "loan" for the amount at ~0.5% (or whatever your savings interest rate is). I call it a "loan" because you will refill your savings over time, and the cost you incur by going this route is the interest rate on the money taken out until it's replenished.
It is hard to conceive of situations where having 4k in credit card debt and 6k in the bank is preferable to no debt and 2k in the bank. The only thing is that you must continue to maintain a minimum amount of savings to make minimum payments on the card in case you need to use it for additional unexpected expenses before you've replenished your savings.
The only reason you wouldn't would be because of an emergency, but you should build up an emergency fund for emergencies.
Not paying off a credit card every month is spending money for no reason. Do not do this.
This is objectively bad advice.
To @see317:
Check out the sites that kaliyama posted, pick a card that has no annual fee and gives you rewards that you know you will use.
Your idea about using credit cards to spread out the pain is actually not a good idea. If you had the credit cards then, you should still do exactly what you just did - use your emergency fund to pay up front, and then rebuild it back up slowly over time. The whole point of having an emergency fund is so you have the cash on hand to not be forced into an onerous loan rate.
The best way to use credit cards is to put expenses on them that you are going to pay off every month, and then rack up the rewards. Even if all you do is get 1% cash back, that's a 1% return on all of your expenses, which is frankly better than the return you would currently get in a savings account. Other than that, credit cards exist in the case of dire emergencies where you no longer have savings and you need to purchase something immediately. Even in that case, the expectation should be that you will get the money before the bill comes due (e.g., a paycheck) to pay it back either in part or in full.
Avoid getting on the "monthly payment" train. It is a train that leads straight into a death spiral of indentured servitude. Yes, you can get away with it for a few months with a relatively low balance, but the longer it goes on the worse it gets, and it can get worse very, very quickly.
Also, you likely could have paid for the furnace on an installment plan with little-to-no interest. Did you ask if that was an option? I'd be very surprised if they aren't used to that kind of thing.
For most major homeowner expenses (furnace, HVAC, plumbing, electrical, roof, etc) your service provider will likely be able to offer you an installment plan which will give you much much better rates than a CC. Most people dont have 5-10K lying around to spend immediately and they get that. It can give you breathing room in case you're not sure you want to empty your cash reserves. I just had to eat about $9K in plumbing expenses and they offered 6% up to 6 years; I'm sure they would've done 0% 12 months. If you are going to pay cash anyways you should be able to knock them down a fair bit on pricing. I think I got about 15% off by offering a cash deal. They aren't going to offer you that though, you have to play the game. If you're looking for a card, in addition to the sites kaliyama provided, check out creditcards.com; you can search for cards based on types of rewards (miles, cash back, points for hotel stays, low interest rates).
I cannot recommend the Costco AmEx enough:
* No fees (technically, it's rolled into your membership.)
* Accrues cash back in a certificate on purchases (2% on gas/travel/restaurants, 1% on everything else) While the certificate is only good at Costco, it can be cashed in for actual currency.
* Because the card also serves as your Costco membership card, this adds an additional layer of security (your photo on the back).
* Available with chip for more security.
I carry a Costco AmEx and a debit card as my credit cards, and I ALWAYS pay it off in full.
Slight hijack: I was thinking of starting a Costco membership and was looking at the card, but since they announced that their relationship with AmEx will be ending, is still worth getting?
Yes - they will give you at least 6 months (if not a year) to obtain any rewards you have gotten when the agreement expires. Also, there's a good chance that either Costco or AmEx (or both) will give you a special deal on any new cards in order to keep you as a customer.
2) Find a reasonable point reward card (Chase Freedom/Sapphire) and pay it off each month. Pay the points into cash and charge it back to the card.
Yeah, I'm kind of excited to see what they come up with for the new CapOne Costco Visa next year. Should be interesting.
I recommend cashback over rewards cards; it's difficult to make rewards cards as worthwhile as cashback cards. If you're thinking of getting a low interest card then you don't know enough about credit cards to have a credit card, or you're not in a financial position where you can afford a credit card.
If it's within your financial means, and your financial institutions allow it, a line of credit is a better emergency fallback than a credit card, but having a cash reserve should be the primary means of emergency fallback for most people. Keeping a large cash reserve has it's own problems - you're not earning money on it, or you're earning very little. Around 1% is often the best that you'll get without having at least several thousand dollars in the account at a time. The amount of emergency cash to set aside is going to vary from person to person and household to household, it's going to be affected by availability of credit, and likelihood of emergencies. A person who can put $2,000 on a line of credit with a 6.5% annual interest rate and who'll have it paid down within six weeks based solely on their normal paycheck is probably going to be less worried about having cash on hand than someone who is just above being paycheck to paycheck - but that person with a line of credit probably still has (or should have) a cash reserve. Basically, everyone should have cash reserves, but how exactly how much is going to vary on personal situation and availability of cheap credit.
Also, balance protection insurance is not your friend.
Basically,
Discover it. It has bonuses you'd expect from an annual fee like waiving your first late fee and showing your credit score. A 5% rotating cash back and a 1% base. No annual fee. Not bad.
AmEx Everyday. It's an AmEx so if it's your only card you'll run into problems. But it has 2% off on grocery stores, 1% off otherwise and an extra bit of cash back if you use it 20 times a billing cycle. Which most people do automatically. I used to, for example, until I got:
Citi Doublecash. 1% off when you buy. another 1% off when you pay your purchase off. It's just about as good as a card with no annual fee can be as far as pure cashback. A mastercard means it'll be accepted widely. As you can tell I prioritize cash back over other things, but I hope my suggestions at least gave you a starting point.
In addition, if you knew your furnace was nearing its last legs, your local utility company probably had a loan program you could've applied for. In my state of Massachusetts, MassSave.com, a coalition of local utility companies, offers $25k at 0% financing for 7 years to replace a furnace.