Wednesday, May 29, 2013

Finding a good credit card

This is a post to summarize some features I look for in a credit card and resources for where to research them.  It has been a long time since I applied for one, though.

Must haves
  • No annual fee.  Since there are many options without fees, why pay a fee?  Some cards offer interesting concierge and travel benefits but their fees can be as high as $400-$500 a year.  Since I don't have a lifestyle to take advantage of those, I don't bother with them.
  • Cash back.  There are many cards which offer cash back varying from < 1% to 5%.  Some have rotating categories of spending (e.g. for one month you get 2% on groceries, otherwise it falls back to the standard rate of 0.5%), some are tiered (e.g. 1% for the first $5000 spent per year, 2% thereafter, etc.).  I don't think it's that critical to try and optimize this return.  Just getting something is good enough.
  • Annual summary statement.  This is a great benefit at least for me.  At the beginning of each year, I can toss out all of the statements and just hang on to the annual summary statement.
  • Auto rental insurance.  Having this allows one to decline the various insurance add-ons that rental car companies tend to offer.  The catch is that the rental must be paid for with that credit card.
  • Extended warranty.  Many cards offer an extended warranty for products purchased with the card, doubling the manufacturer's warranty, up to 2 years.
  • Good customer service.  This one is hard to figure out without actually getting the card.  At a minimum, there should be 24-7 customer service, and it shouldn't be something that is only automated after hours.
Nice to have
  • No foreign exchange transaction fee.  This is a fee that credit cards usually tack on to purchases made in a foreign currency, even though it might be a web purchase.  The typical fee is about 3% but some cards charge a lower fee, like 1%.  This is getting harder to avoid.  There are cards which offered no foreign transaction fees in the past but now charge 1%.
Don't care for
  • Loyalty programs.  I don't care for cards that offer frequent flyer miles or other loyalty programs such as hotel or shopping points.  This means that I am stuck with whatever they offer and I find that restricts my options when it comes time to plan for travel or shopping.
  • Low interest rate or balance transfer fees.  I usually pay my card in full each billing cycle.
How many cards?

Can't have zero because we need credit cards for such basic things as renting a car and reserving a hotel room.  One card can be limiting.  Sometimes, there are situations where a card is lost, forgotten at a merchant, or compromised by fraud and thus deactivated.  In those situations, it helps to have a second card handy.  Finally, having just one card may mean that it is not accepted everywhere.  For example, many places in Europe do not accept American Express.  Also, while VISA and Mastercard are almost universally accepted in the US, there are merchants in Europe that will accept only one or the other.  So it's generally a good idea to have at least 2, or maybe even 3 cards.

I would avoid getting too many cards or even getting a card for its introductory freebies and then canceling it.  Your personal details will be in too many places and despite all of the security, there can be loss or theft of that personal information and identity theft is on the rise.

Credit cards and credit history

Each time we apply for a credit card, our credit score gets dinged; not by much, but it does get dinged.  So that is something to keep in mind.  Getting lots of cards and canceling them also dings the credit score.  Having lots of high-balance credit cards, even if they are not used, negatively impacts the credit score because the person is viewed being at risk of being able to run up large balances.  Finally, even after we close a credit card account, it typically remains in the credit report for up to 7 years.

Places to research credit cards
Additional reading
(Disclaimer:  I am not an expert in this area.  This is just a quick summary of what I've learned over the years.  If you happen to find an inaccuracies, I'd appreciate hearing about them so I can correct them.)

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