To find the right credit card for you, it helps to determine how you use credit. Although some are saddled with thousands of dollars in debt and others pay off their balances fastidiously, most of us are somewhere in between. Here are three card-user profiles:
Card User A puts all her monthly charges on her card. She pays the entire balance every month before the due date. Because she pays her bills before the grace period
ends, she pays no interest expense. The best credit card for her is one with no annual fee.
or other rewards
card may also make sense. For an annual fee that usually ranges between $75 and $100, she can likely earn enough miles or rewards points to make the decision economical.
Card User B has average monthly balances
of $5,000. He regularly transfers
his balances to new cards that offer teaser-rate
programs. He pays an average interest rate of 15 percent on his cards, or $750 a year in interest. His best strategy is to find and keep a low-fee card that offers a regular rate lower than the current average rate he pays. For example, if he could find a card that would allow him to consolidate
his balances at 12 percent for a $50 annual fee, he could cut his yearly interest expense by $100.
Card User C has average monthly balances of $1,000 and pays a $25 annual fee. His current card rate is 14 percent. This costs him, on average, $140 a year in interest. He's evaluating a card offer with a 10 percent rate and $50 fee. Is the lower rate worth the higher annual fee? With a $1,000 average balance it is. The new card will save him $40 in yearly interest expense and cost him $25 more, for a net savings of $15.
However, as Card User C begins to pay off his balance, the decision to stay with his current card becomes the better decision. With a $500 average balance, for instance, his yearly outlay with his current card is $70 in interest plus the $25 fee, or $95. The yearly outlay for the alternative card would be $50 in interest plus the $50 fee, or $100.
Of course, changes in interest rates will change the dollar savings and costs but the basic relationships remain. As your average monthly balances decline, a difference in interest rates, or spread
, between two cards will matter less.
If you're more like Card User B or C, you may want to setup a repayment plan.
You can start by calculating an average yearly
balance for each of your cards. To do this, you take the average of your average monthly balances over a 12-month period. You may find this step to be helpful, since most of us spend more at certain times of the year than other times.
After doing this for each card, calculate a weighted-average
interest rate of all your card debt. Consider using a table similar to this:
|Percent. of Total|
After calculating the average-weighted rate, estimate your future card use. To have a successful repayment plan, remember, you need to pay more than what you charge. Determine how much you can pay each month by reviewing your personal cash flow
. Be sure to include in that estimate of cash outflows the amount of your future monthly charges. Be sure to pay off the higher-rate card debt first.
Finally, you should review and update your repayment plan every six months or so. This allows you to see if you're making satisfactory progress. If you're better off, great: keep going. Consider a faster repayment plan. If you're worse off, you may want to
consult a credit counseling service.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.