Credit cards today come in all shapes and sizes: standard, gold, platinum, rewards, secured, fixed rate, variable rate, fees, no fees, extended warranty, photo ID, ..... And, if you can believe it, more are being created every day by marketing departments trying to capitalize on America's thirst for consumer spending, and the related debt.
There are so many choices for cards, how does an individual choose what is right for him? I'll make several recommendations, but all are predicated by the fact that there are no "problems" with your credit history or spending patterns. (I do not want to promote overspending, just because you can!).
My personal opinion is that a family should have three credit cards, that should cover "normal" spending needs, and a fourth if you have outstanding balances to take advantage of introductory rates. First I'll make the statement that you should never agree to pay any annual fees. There is so much competition in the credit card industry, that you will always be able to find a card issuer willing to waive fees. In fact, just by calling the toll-free customer service line, I have consistently gotten issuers to refund any fees charged to my account. Of course you may have to threaten to cancel your account, but that is easy to follow through on. I finally got tired of having to call to get fees waived, so I did cancel my card that "tried" to charge me a fee.
Card #1 Credit card to be used for making monthly purchases. This card is not to carry a balance on. It is only used to make purchases for convenience. By not having to write checks, or carry cash, you can save yourself time and money by only writing one check per month to pay for all household operating purchases. My recommendation: Discover Card - no annual fee, and refunds up to 1% of annual purchases in cash annually.
Card #2 No annual fee VISA or Mastercard to be used where Discover is not accepted. There are still some businesses and restaurants where they don't accept Discover. I always complain, use my VISA or Mastercard, and try not to use that establishment again, unless they start taking Discover. Card #2 is also not meant to carry a balance on.
Card #3 No annual fee, low interest rate card. This card is the one to be used for short-term financing and for an emergency fund. There is a glut of low introductory rate cards on the market. (See Card #4) Your emergency card will have lower rate than the average cards available. Presently cards with rates around 12% are easily available. Some are fixed and some are variable, but I am talking about cards that will stay at a reasonable rate.
Card #4 No annual fee, low "intro." rate for a period of 6-12 months. Rates of 6.4%, 7.9%, 8.9%, etc. have been offered by almost every Mastercard and VISA issuer. These low starting rate cards are good to use if you will pay off your balance before the end of the introductory period, or if you intend on taking advantage of another introductory offer to transfer the balance before the first one expires. If you get caught with an expiring intro.-rate when you don't have another to switch to, the increased rates can eat up a lot of your interest savings. "Churning" is the industry term for people who just keep transferring balances to new intro.-rate cards. I personally don't see anything wrong with taking advantage of this opportunity, but a word of caution: it is not for the faint of heart, and you have to keep on top of everything. Timing of applying for new cards, and paying off the old before the rate changes is a lot of work, worry, and takes dedication.
Affiliation and reward cards: My opinion is BEWARE. These cards promise free gifts, merchandise purchases, free travel miles, free gas, and even the Ford and GM cards allowing you to accumulate money towards your next car purchase. In general - the "savings" that these cards promise is rarely delivered. For example - the "Car" cards will allow you to accumulate up to $3,000 towards the purchase of a new car. Not bad, but the restrictions are many: limitations on what you can accumulate in a year, how long the credit will be available before expiring, annual fees, high interest if you can't pay your balance, and the big assumption that in three years, when you have accumulated the maximum allowed before expiring, that there is a car model that you would want to buy. My feelings are that I would use my GM card for the three years, then Ford would come out with a new model that I would "have to have" (or vice-versa!)
My "four-card" scheme is meant to take advantage of the optimal opportunities available. If you already have balances, bad credit, or other specific issues, my recommendations may not be available to you. The guidelines for usage however, is generic to any situation.
If you have any questions regarding credit cards, or have suggestions for topics that you would like covered, please post comments on the blog, or email to "Joe's Money" via email to batitude@verizon.net.
Originally written May 1995
JOE'S MONEY - Topic: - Credit Cards
March 14th, 2008 at 06:37 am
March 14th, 2008 at 12:46 pm 1205498782
If your situation changed and you were laid off, some bill payers don't except credit cards. I can't pay for rent of a mortgage with a credit card. The best place for an emergency fund is cash or cash equivalents.
True, you have opportunity costs, but that's not the purpose of an emergency fund. An emergency fund is insurance against big financial events in life.
March 14th, 2008 at 12:55 pm 1205499330
Though we do always carry a second rewards visa just in case a charge is rejected at the wrong time (which certainly happens when credit card issuers get overly zealous with fraud monitoring. I can't tell you how many times the second card was very convenient to have).
#3 is iffy, but I understand. Not everyone has an emergency fund.
& we have made a lot of money off of #4.
Overall, a good list.
March 14th, 2008 at 01:07 pm 1205500031
March 14th, 2008 at 01:48 pm 1205502501
Oh and Merch, usually that isn't necessary because most credit cards let you grab a temp number online to use for single transactions. My grandmother had the low balance card for the internet and her problem was they kept upping the limit without her permission so it never stayed low. My problem is that I don't get approved for low limits and most cards have a min amount of credit line that they offer before you have to use a less "elite" card.
March 14th, 2008 at 01:54 pm 1205502879
March 14th, 2008 at 02:22 pm 1205504542
Well, as I am sure that you realize, there is a lot more to it than just cherry picking cards of your choice. Not everyone will have the sterling credit. However, assuming that you do:
1. As others have stated, you can solve your primary credit card needs with something like a Citi Platinum Visa. It's Visa. It earns cash back.
This might also be a good time to mention the importance of having an effective transaction tracking system in place. Whether it's keeping receipts or looking at your statement at the end of your month, you don't want to charged with fees and having your APR bumped up. It would also be ideal to pay off the balance at the end of every month.
2. As others have also stated, the best form of short term emergency fund is to have money saved up somewhere. Consumer debt can be used as a life line, but it's far from ideal.
3. The best cards to have in addition to that is 0% APR cards (again, assuming you have good credit to begin with) that you can use for balance transfers. However, this is not recommended unless you're bringing on your financial "A game". You don't want anything to slip up. This process can either make you a little bit of passive income or it can help you temporarily remove the interest charges on your debts.
That's it in my opinion. Keep it simple. Unless you find a good gas card or something.
April 1st, 2008 at 05:55 am 1207029313
Merch - I have met very few people that truly had an "Emergency" fund as promoted by financial planners and wealth management advice/Self-help books. The real bottom line is that if you already have any high-rate interest debt then putting money away instead of paying down that debt is hardly ever beneficial. I personally "invest" any funds that are expected to be able to earn a higher return instead of just socking it away as an emergency fund - then my sources of emergency cash is - current cash, low-rate balance transfers, borrow against the investment (margin), sell the investment, borrow against easily financed assets (car titles), 401K loan, and then higher rate loans or credit cards.
monkeyman - I have been looking since your I read your comment, and am not sure that I have found a cash rewards card that is overall better than my flat 1% on Discover. The other cards I have seen might have some categories (gas, grocery) at a slightly higher rebate, and some have "into" 5%, or have upper limits. I am still looking, and am very open to finding something better - and only using 1 card for all purchases and pay in full each month. If you or anyone can direct me to a permanent, better than 1% cash rebate without restrictions - please post it!
Ima Saver - I couldn't find any 3% card, but would like more info. The other good thing with Discover is that I can credit to my account any time it is over $20 in a month (increments of $20 - so no waiting around for them to cut me a check. I received over $1000 each year for the last 10+ years. At 3% it would be 3 times that - so please let me know the exact card terms.
Broken Arrow - This was an "update", but most things that I originally wrote was still valid, so I didn't remove or update much - and these types of comments are what I was looking for. The Citi Platinum cash rebate I looked at had intro 5%, but really looked like 1% overall - but if I haven't found the right one yet - I am interested. I absolutely agree on bringing your financial A-game. I use Quicken to track all financial transactions, and always set-up Automatic payments while in an intro period to make sure that payments are never late. Using Quicken to update credit cards activity (and reconcile!) makes it much more manageable.
Other posters, and the comments that I didn't respond directly to - thanks for all of the input!