You are hereChoosing the Right Credit Cards Part 1: Purchase, Loan, and Revolving Cards

Choosing the Right Credit Cards Part 1: Purchase, Loan, and Revolving Cards


By Dave - Posted on 11 June 2008

 This article will the first in a series devoted to helping readers select credit cards best suited to their needs.
 
Choosing a credit card can be a daunting process. Since no card is best for all types of credit card use, it pays to think through just how new credit be used. Credit cards can be categorized based on how well they serve three distinct purposes.
 
Purchase Cards. These cards are used to buy goods and services which are then promptly paid off. Features that make purchases more secure, more convenient, and/or more rewarding are of paramount importance for purchase cards. The right card can make it easier to track your expenditures; make sure that your goods are given extended protection against loss, failure, or even buyer's remorse; and even compensate you for its use through cash back or rewards points.
 
Loan Cards. Credit cards often provide the quickest and easiest means of unsecured1 borrowing available to individuals and small businesses. Moreover, when used carefully, certain credit cards will offer not just the easiest, but often the very cheapest credit available. Key features for such “loan cards” are the methods of access—for example, “balance transfer”, direct deposit, or “cash advance”--and the interest rates and fees involved in these access methods. Also critical are how they get reported to credit reporting agencies. Do they report, and if so to which agencies? Do they report the actual limit on the card, or just the past “high balance”? Answers to such questions help a prospective credit card borrower predict how such borrowing will affect her creditworthiness going forward.
 
Revolving Cards. Some cards are used primarily or exclusively for purchases, but for whatever reason are not paid off in full each month. Indeed, while reliable estimates of “revolving” usage are hard to find, some indicate that under less than half of credit card purchasers pay off their balances in full in any given month. Not paying off such balances is almost always a mistake, even in situations where money is tight. However, that's an issue for another column. For now, let's simply note that the most important feature of any revolving card is its purchase interest rate. Since revolving cards include purchases, the features of “purchase” cards as described above are desirable for these cards. But invariably, the expense of interest paid on revolved balances—which is generally not tax deductable—far outweigh benefits like rewards or extended warranties.
 
Bottom line: identify your credit need before chosing your cards. Think of a credit card as a financial tool that needs features appropriate to the task you will be using it for. By deciding whether you need a purchase, loan, or revolving credit card, you will be able to focus your search on the credit tool best suited to your needs.

1. That is, without collateral like a house, car, or business equipment.



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