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How to choose a credit card
When looking to get a credit card, there are a variety of things you should consider. If you want a rewards card to use frequently, you might not mind paying a $100 or $200 annual fee. You should also consider the regular APR (as opposed to the introductory rate) and the interest rate. A good interest rate is dependent on how you will use the card. For example, a 20% interest rate is fine if you plan on paying off the balance every month.
It pays to ask these kinds of questions before you fill out the application form. Here are 9 questions you want answered before you sign on the dotted line.
The “very first question” the consumer should ask is, “Why am I applying for this card? Why do I need this card?” says Bruce McClary, media director for ClearPoint Credit Counseling Solutions, a nonprofit affiliated with the National Foundation for Credit Counseling
Some positive reasons: The card has low or no fees, a lower interest rate or offers a rewards program that suits your spending habits. “It has to make sense, and it has to fit into your overall lifestyle,” McClary says.
Do you pay off your credit card balances every month? If so, “you don’t care what the interest rate is because you won’t pay any,” says Ric Edelman, author of “The Truth About Money.” “But you care about the (annual) fee,” he says.
If you run a balance, you want the lowest rate you can get, even if that comes with an annual fee.
One clue to your usage: “Look at your past history,” says Edelman. “Because what you’ve done before is what you will be doing.”
If you’re shopping for a card, chances are you’re comparing card terms. But if an issuer sends you an offer, it’s tempting to apply and see what you get.
“It’s really difficult to pick one (in isolation),” says Kelly Rogers, chief development officer for the Consumer Credit Counseling Service of Orange County and adjunct faculty at Chapman University. “If someone just shows you one car, how do you know if it’s the right car for you?”
Her advice: Do a side-by-side comparison of several different cards before you apply.
Don’t be afraid to plug the card name, “complaints” and “customer service” into your favorite search engine. “I go through and see who has the least amount of complaints and issues,” says Rogers.
Some cards will give you a range of rates you could get, but often that window is pretty wide, says Nick Bourke, director of the Safe Credit Card Project at The Pew Charitable Trusts. Other cards may offer a specific rate (or terms) and either approve or reject you.
If you’re operating totally in the dark, you have another option: Apply by phone and push for an answer on your rate and credit line before the account is opened.
While there are no guarantees, sometimes you can get an answer, says Bourke.
“I’ve actually done this myself,” he says, admitting “you do have to go pretty far in the process.”
You may have to ask for the department that’s actually evaluating your application to get an answer, he says.
“The thing that you want to do is when you’re talking to the person on the phone taking your application is you want to push them as hard as you can to get your APR and credit line,” Bourke says. Then, once you have the information and before the account is opened in your name, “you can say yes or no at that point,” he says.
According to the Credit Card Accountability, Responsibility and Disclosure Act of 2009, if a card offers a lower interest rate during an introductory period, the promotional rate has to last at least six months. While that introductory offer may be appealing, the regular rate is what you’re really buying.
So find out when the introductory APR expires and what the new rate will be. You can find this information online in the terms and conditions for the card or you can ask a service representative.
Another smart question: How long is that grace period? “Some cards start charging interest immediately,” says Edelman. A card can have different grace periods for balance transfers and cash advances than it does for purchases.
You can find information about the grace period in the credit card offer, thanks to federal rules that took effect in 2010. Look for a summary table of rate and fee disclosures, which will include a statement that explains how to avoid paying interest.
If you’re getting the card for points or rewards, this is one you definitely need to ask, says Josh Frank, senior researcher with the Center for Responsible Lending. Some issuers will revoke rewards if you’re late with a payment by even one day, he says.
“A lot of times, the answer they will give you is that they can take away or reduce your rewards for any reason,” he says. While that’s true, the issuer will have a policy on revoking or reducing points, and that’s what you want to ask about, he says. Under what specific circumstances would they reduce or eliminate a customer’s points?
In most cases, “this is one the customer service agent should know the answer to,” he says.
Some card issuers use your purchase records to assess your ongoing creditworthiness.
That means if you suddenly use your card to purchase retread tires, pay for a session with a marriage counselor or make a purchase at a market on a sketchy side of town, you could see your APR climb or your credit limit fall, says Frank. If you see this practice as an invasion of privacy, ask beforehand if the issuer does this, he says.
How to phrase it: Can my transactions ever be used in rating my credit risk?
And that’s one question the customer service representative “might not know the answer to,” says Frank. “You might want to ask them to transfer you to the credit department manager.”
If you are guaranteeing a card account by co-signing for a college student, ask if you will be on the hook for the debt after the other party turns 21, says Chi Chi Wu, staff attorney for the National Consumer Law Center.
Many times, “there is nothing to prevent the issuers from saying you’re going to be guaranteeing this card 15 years from now — long after junior is out of college,” she says.
In addition, find out exactly what has to be done to get you off the account. Are you free to complete those steps yourself? Or will you need the cooperation of someone who might not want you — and those charging privileges — to go away?
Federal regulations limit your liability for unauthorized credit card charges to $50 if you report it within two business days. The longer you wait, the more you may lose. Many issuers cap losses at zero dollars, provided you follow a few rules. So find out how the card would handle charges you didn’t make, says McClary.
Also, does the issuer monitor usage and shut down the card if it sees out-of-the-ordinary charges or spending locations? That feature can be great if you always use the card for the same types of purchases in the same geographic area, but cumbersome if you’re getting the card for travel.
While it sounds counterproductive, you want to ask some detailed questions on how the issuer will treat you if you run into financial problems, says McClary.
Will you lose points or benefits? Will you be hit with late fees or a penalty rate? Ask what those penalties are or look online at the terms and conditions for the card.
Some issuers have programs to slash interest temporarily for customers who get behind, he says. Others don’t. So find out ahead of time what kind of programs the issuer offers that will help you rehabilitate your account and restore your original terms, McClary says.
Ask about the “worst case scenario,” he says. “When do they consider an account to be charged off? And when do they send an account to a collection agency?”
“It may be a little tough to get a hold of that information because it might not be readily available at the customer service level,” says McClary. “You may have to punch it up a level.”