Credit cards are a wonderful example of modern financial engineering. They provide convenience, security and access to immediate funds that you may not actually have sitting in an account somewhere.
In return for these benefits, you pay interest, fees and charges to a financial institution. The trick therefore is to get everything you need in a card, and pay as little as possible in return.
Financial institutions target different consumers by creating different credit cards. Some are designed to appeal to big spenders and some to small spenders. When used correctly, credit cards can actually save you money, earn you rewards, and make your life easier. When used incorrectly however, credit cards can cause you financial pain and stress.
Well, the main differences are well known. The annual interest rate charged is one. This can vary greatly between cards. Interest is charged on the money you have effectively borrowed from the issuer. The longer you take to pay off those purchases and cash advances, the more interest it will cost you.
Another major difference is in the fees and charges. You can see a more complete list here, but they include the annual fee, late payment fees, and anything else the institution can get away with charging before you get fed up and take your business elsewhere.
Some institutions also offer 'freebies' and other rewards for using their cards. Competition is tough out there, with so many cards on offer, and institutions are always searching for ways to make their products (cards) stand out above the rest.
Well, everyone is different, so there is no single answer. However, there are a couple of major principles to keep in mind when sifting through the cards on the market.
Do you pay your card off in full every month, or do you revolve a balance continuously, paying more off when you have some extra free income?
Do you spend a lot each month, or only a little? Do you manage to pay this off in full, or pay off most of it, or not pay much at all?
Perhaps a few examples will help clarify what we area talking about.
Sally Shopper is 24, works part-time in retail during the week while studying physio. Because Sally likes to shop, and her income isn't sufficient to cover these little indulgences, Sally has decided that a credit card will help her live the lifestyle she wants until she graduates and her income rises.
Sally is considering a card with a high annual fee and rewards program that will earn her 1 point for every dollar spent. This card also carries a high interest rate.
Is this the best credit card for Sally?
Well, probably not. Cards with high-fees and high interest rates generally compensate by offering rewards programs to users. Points can be redeemed for cases of wine, holidays away, luxury car hire etc. However, to earn enough points to claim these gifts it is necessary to spend tens of thousands of dollars, which Sally probably won't do.
Sally would be better off with a card that charges a low annual fee, and a low interest rate. Because Sally won't be paying off her card in the short term, she should focus on keeping those monthly repayments low. In time when her income increases and her circumstances change, she may consider changing her card to match.
Chuck is an executive at a large inner-city advertising agency. With his 10-year work anniversary approaching, no kids and (therefore) a healthy disposable income, Chuck spends up big each month on dinners out, weekends away and an up-to-date wardrobe. While Chuck has plenty of cash to cover these expenses, he could benefit from a card that offers a rewards program, like the one Sally was considering.
Again, these cards make back the cost of the rewards program by levying high annual fees and high annual interest rates. Chuck will want to make sure he pays off the balance in full each month to avoid interest costs. If he does so, he may even accumulate enough points and redeem enough gifts to justify paying the high annual fee.
Between Chuck and Sally there are an infinite number of individual circumstances that will impact upon the choice of credit card for each consumer. For example some will want a card specifically for the purpose of travelling internationally, where the security of accessing funds from overseas ATM's takes precedence over other considerations.
Compare credit cards here!
To help you choose the best credit card for you, we've created a database of credit cards from many institutions. Click here to take a look. Once you've decided, you can apply online. Most issuers will respond with an answer within a few working days.