By Sean A. Kelly
Credit cards have a way of being our friend and our enemy at the same time. At times they may be useful and actually helpful but sometimes they may land us into the deepest financial hole. I have a friend who had to rebuild his life after incurring overwhelming debts due to his credit card swiping habits. His name is Eric. He enrolled into a debt management program under Freedom Debt Relief (FDR) so that he could persistently and consistently pay off his credit card debts over a few years. Once he completed his program, he wanted to apply for just one credit card to keep in case of emergencies. He did not want to choose a card that would only cause history to repeat itself. Based on the information he gathered during his credit counseling stint at FDR, he surmised that he could follow a few simple rules when choosing the right credit card.
The first thing Eric had to figure out was the type of credit card that he would need. To determine that, he would have to decide what he was going to use the card for. There are many types of credit cards that include standard, premium, charge, limited purpose cards, secured and prepaid credit cards. Each card has a different credit limit, payment options and even different interest rates and annual fees. Eric wanted to keep a card for emergencies such as for car repair or medical treatments. So in this aspect he figured perhaps a charge card would serve his purpose well as it does not have a credit limit because the balance is to be paid in full at the end of the month. However, he would need to have excellent credit rating to be eligible for a charge card and with his recent debt settlement history on his credit report they would probably not approve his request for a card with no credit limit.
Another aspect Eric looked into was the annual percentage rate (APR). Ideally, the credit card to choose would have to be the card with the lowest percentage rate because this will determine how much interest will be charged on the balance of his card every month. Eric preferred credit cards with a percentage rate of below 12%. Other than the APR, Eric was also advised to consider the number of fees associated with using the card. Many companies charge annual fees but there may also be hidden charges that credit card holders are rarely aware of such as closure, over-the-limit and late charges. The amount of these charges may also differ from one company to another. Basically, a low interest rate alone probably would not help him save any money if the fees are high.
Credit cards may also offer many perks and rewards. To Eric, this feature could be a double-edged sword as it could give him more benefits but also cause him to spend mindlessly due to the discounts or prizes that he would get by using the card. Basically the rewards act as incentives to lure customers and reward loyal ones. Some are even inclusive of a rewards program that offer airline mileage and cash back on your purchases. To many people, this may be the last thing they would look at when considering to apply for a credit card. But for a reformed impulsive credit card swipe machine like Eric, he would have to choose a card with the least rewards. Basically the idea is that if they reward him less, the less frequent he would feel tempted to use it. After all, credit card rewards may only be worthwhile for frequent credit card users who are often the biggest spenders.
In the end, Eric applied for a standard credit card with low interest rate and reasonable fees. He would use it only in emergencies and he would make a point of paying the balance in full at the end of the month. He does not use it to make daily purchases as he does not want to slip back into the same old habit that dragged him down before.
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