Our pick: Barclaycard Arrival Plus™ World Elite MasterCard®
Earn 50,000 bonus miles and enjoy the current 0% APR for 12 months
- Recommended Credit Score: 720 or higher
- Bonus sign-up points: 50000 if you spend 3000 in the first 90 days
- Annual fee: $89, waived the first year
- Purchase APR: 16.99%–23.99% variable
- Intro balance transfer 0% for 12 months
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How credit cards work
A credit card is an unsecured revolving line of credit, which basically means you can borrow money to make purchases without having to put up collateral (upfront cash). Based on your perceived ability to make repayments, credit card companies assign a credit limit, which is the maximum amount of money you can borrow.
Unlike a debit card that uses your own money to make purchases, when you use a credit card, it is the lender who pays the retailer. At the end of your billing cycle, you receive a statement and that tells you the total amount you owe the lender for that period. Credit card companies make money on fees and the interest that accrues on your revolving credit.
There are many types of credit cards depending on the type of user. They range from general-purpose cards issued by big banks, to secured cards for people with poor credit, to co-branded store credit cards incentivizing you to keep shopping at Walmart or Amazon.
Credit card companies have been offering increasingly shiny rewards, sign-up bonuses, and travel perks to lure new users to spend with them. This is great if you pay your bills on time and in full. If you don’t, you offset any rewards gained by paying fees and interest For those using credit cards because money is tight, If you don’t, you will end up paying
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How credit card interest works
As you spend on your credit card, your debts will also begin to collect interest if you’re unable to pay the whole balance back by the end of the statement or interest-free period. If you’ve used your card for purchases, it will start collecting interest charge. This is called an APR, or annual percentage rate, and it usually hovers between 11.99% and 20%. If you’ve used your card for an ATM withdrawal or any other transaction that’s considered a cash advance, you’ll accrue the cash advance rate of up to around 22%.
If you decide to transfer your debt from one card to another — maybe another card offers a better APR — you’ll also accrue a balance transfer interest rate, which is usually the same as either the interest rate or cash advance rate. Some cards do offer 0% promotional periods on purchases and balance transfers, so this is something to keep in mind during your comparison.
Each month, you’ll receive a statement that will detail the transactions you’ve made, the total outstanding balance you have and any interest you’re accruing. While you’re only required to pay a minimum repayment each month (2-3% of your total balance), it’s best to pay as much as you can. If you pay your entire balance in full, you can usually take advantage of up to 55 interest-free days in the next statement period. If you don’t pay your entire balance in full, the remainder will start to collect interest. If you miss the minimum repayment, you could be charged late payment fees.
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Comparing credit card features
Most popular credit card features
Consolidate an existing debt at a lower APR with a balance transfer card.
- Manage your debt. The longer the low or 0% balance transfer APR lasts, the more you’ll save.
- Beware of the revert rate. When the introductory low or 0% APR ends, you could find yourself confronted with a much higher interest rate.
What should I consider when transferring a balance to a new credit card?
- What is the balance transfer offer? There are a few ways to compare how competitive an offer is. The introductory APR you’ll be charged on a balance transfer card is usually low or 0%, so this is something you’ll want to consider. The length of the balance transfer period also differs, though it generally falls between six and 24 months. You’ll want to choose a balance transfer offer that will allow you to pay off your debt before the offer ends.
- What’s the revert rate? If you don’t think you can repay your existing debt within the promotional period, consider whether the revert APR will attract more interest and how this will impact the savings you’ve made.
- How much can I transfer? Many providers set limits on the percentage of the credit limit you can transfer. If your existing balance exceeds the limit, you may want to consider a card with a higher credit limit.
A rewards card can be a worthwhile way to get something back from your spending. Whether you’re a frequent flyer, loyal customer or big grocery spender, you can find a rewards credit card to suit almost any lifestyle.
- The major draw of this type of card is earning points that can be redeemed for rewards. Depending on the card you use and the promotions in place, you may be able to earn bonus points when making certain types of purchases or shopping with a particular retailer.
- What you can redeem your points for will vary from card to card. Some allow you to redeem points for flight rewards as well as shopping or travel vouchers. Others can be used for cash back, to redeem merchandise or even to donate to charity.
What should I keep in mind when considering a rewards credit card?
- What are the associated costs?Typically the higher the rewards the higher the card costs, so be careful. While some rewards cards charge no ongoing annual fees, others charge higher annual fees up to $450 and beyond. The more features the card has, the higher the fee is likely to be.
- Are there limitations?Your card provider might not let you earn more than a given number of points in a calendar year, and your points can also expire after a set time frame.
- What are the other perks? Most rewards cards are affiliated with Visa or MasterCard, and you can use these cards in over 200 countries and territories worldwide. Many rewards cards also offer extra perks, such as complimentary rental car insurance. Compare your options to see which features work best with your lifestyle and spending habits.
Cards with 0% APR
If you’re looking for a card that can lead to significant savings on interest, a 0% APR credit card could be the right choice for you.
- 0% APR credit cards allow cardholders to take their time when paying off larger purchases or consolidating existing debt.
- If the 0% APR is only in place for an introductory period, the revert rate could be significantly higher. These cards often require applicants to have a good credit history as well.
What should I keep in mind when considering a 0% APR credit card?
- How long is the 0% APR? Carefully confirm how long the 0% offer lasts. If you do not repay your balance by the end of the promotional period, you may find that your existing debt attracts a much higher APR.
- Are there other fees? If there’s an annual fee, make sure that the savings you’ll make in interest and other benefits of the card will offset the annual fee.
- What are the other perks? Is there a rewards program, or can you earn bonus interest-free days if you pay your balance in full each month? Extra features like these can help you determine the true value of the card.
Cards with low interest
A low interest credit card allows cardholders to repay their debts at a lower APR than your standard card. Depending on the card, the length of the low interest period may vary from an introductory period to the life of the card.
- If you struggle to repay your balance each month, low interest cards can help you reduce the costs of your card.
- The advantage of low interest usually comes at the cost of forfeiting the extra features that a premium or platinum card may offer, such as a rewards program, complimentary rental car insurance or other extra perks.
What else should I consider when comparing low interest credit cards?
- How long is the low APR period? Sometimes the low APR will only be in place for an introductory period (say, six to 12 months), whereas other cards may offer the low APR for the lifetime of the card. If it is the former, make sure to check the revert rate to avoid any nasty surprises when the promotional period ends.
- What are the other fees involved? Depending on the card, the low APR may be balanced out by higher fees. Read the terms and conditions of the card to ensure that the overall costs, such as the annual fee, don’t outweigh the low interest.
Cards with no annual fee
A no annual fee card doesn’t charge a yearly fee. Some cards have this as an ongoing deal; others will waive the standard fee for the first year of using the card.
- Not having to pay an annual fee can result in savings each year.
- If the annual fee is only in place for a promotional period, there may be a high annual fee when it reverts to the standard rate.
What should I consider when comparing cards with no annual fees?
- How long is the no annual fee offer in place? You’ll need to confirm whether the no annual fee is in place for the lifetime of the card or only for a promotional period. If it’s the latter, you’ll want to check how long the promotional period lasts and what the annual fee will revert to at the end of the introductory period.
- What other fees and rates are involved? Just because there’s no annual fee doesn’t mean there won’t be other fees associated with the card. For example, if the card comes with a higher APR or a lower rewards rate, you may find that these overshadow the savings you’ve made on the annual fee. Calculate these figures before applying to make sure the card works for you.
- What perks are on offer? Cards with no annual fee often lack additional perks such as high-earning rewards programs or concierge services. If these extra benefits are of value to you, you may want to reconsider what’s on offer.
What are the costs of a credit card?
- Repayments. You’re free to repay as much as you like as often as you like. You’re required to make the minimum repayment when your statement is issued. The minimum repayment is usually 2% of your outstanding balance. You will pay a late payment fee if you don’t make the minimum repayment by the statement due date.
- Annual fee. This is the cost to own a credit card. The annual fee ranges from $0 to hundreds of dollars depending on the credit card type. The credit card annual fee is deducted from your available credit and accrues interest at the purchase rate if it isn’t paid in the first statement period.
- Interest rates. Interest is the price you pay to borrow money. Credit card interest rates are much higher than other types of finance because credit cards are an unsecured product; financial institutions have no recourse to take your assets if you default on your repayments.
- Other fees. Other fees you may run into include late payment fees, overlimit fees (a fee for spending past your credit limit), rewards program membership fees and cash advance fees.
Credit card application tips
While applying for a credit card doesn’t have to be complicated, it can come with certain risks.
- Tip #1: Take your time. It’s never a good idea to rush into things, and it is your right as a consumer to assess the bank before it assesses you.
- Tip #2: Know your needs. Before you begin your search, spend some time considering what you want, need and can afford with your next credit card.
- Tip #3: Compare your options. Once you’ve decided what type of card you want, it’s time to begin comparing your options.
- Interest rates on purchases, cash advances and balance transfer
- Annual fees
- Interest-free periods
- Rewards programs including the partnered program, earn rates and how you can earn and redeem points
- Complimentary insurances including travel insurance, purchase protection and extended warranty cover
- Additional cardholders and whether they come with an additional fee
- Extra benefits such as concierge services and airline lounge passes that’ll help you offset the costs of the card
- Tip #4: Check and improve your credit rating. You should request a free copy of your credit history before applying, so you can correct any possible errors on it and see exactly what the bank will be seeing when they assess your application.
- Tip #5: Lower your credit utilization ratio. If you already have a credit card balance, it’s wise to pay off your existing balances before submitting a new credit card application.
- Tip #6: Don’t apply for multiple cards at once or within a short period. You may be tempted to apply for a second card just in case your first one doesn’t get approved, but don’t. Each credit enquiry that a lender makes about your credit history leaves a new mark on your credit file for five years.
Understanding your credit score
It may sound counterintuitive, but sometimes taking on debt can actually strengthen your financial future. If you’ve ever taken out a student loan, applied for or owned a credit card, or opened up a bank account in your name, you have a credit score. Your credit score is calculated by a credit bureau, and they are observing how responsibly you have handled your loans and your debt. The three major credit bureaus — Equifax, Experian and TransUnion — use a set of factors and complex equations to determine your score. This is important, because your score is often used by lenders to help decide whether to approve you for new credit cards, personal loans and home loans. For example, your Equifax Score is a number between 300 and 850. The higher your number is, the better your credit position is.
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