Photo: largeprime via flickr
In many respects, the options available to consumers seeking credit cards have never been stronger than they are today.After an industry wide retrenchment that began in late 2008 and continued until early 2011, credit card companies have been engaged in a game of one-upmanship that has led to the creation of sign-up incentives that would have been unheard of even in the midst of the credit boom.
Because of the emergence of borderline absurd $200 and even $500 sign-up bonuses presently being marketed, choosing the right credit card is often more difficult now than it was during the depths of the credit crisis when the quality of offers was universally poor. Consequently, it is important to keep these three ideas in mind when comparing cards.
1) Don’t Be Short Term Greedy: One of the most popular rewards credit cards available today is the Chase Freedom Visa. This particular card is marketed with three separate sign-up bonuses ranging from $50 to $100 all the way up to $200.
At first glance, the Chase Freedom $200 offer appears to be the best deal. And, for consumers who pay their credit card bills in full every month, it is. However, the lowest available long term interest rate on the Chase Freedom $200 version (15.99%) is four full percentage points higher than it is on the Chase Freedom $100 card (11.99%) and six full percentage points higher than it is on the $50 version (9.99%).
Over the course of a year, a consumer who carries an average monthly balance of $2,000 would thus spend between $80-$120 more in interest by opting for the $200 version over the $100 or $50 version of the card. This interest expense almost entirely erases the short term benefit provided by the larger upfront bonus in just one year.
2) The Second Year is Expensive: Many rewards credit cards that carry lucrative bonuses waive annual fees during the first year of card-membership. This marketing tactic is beneficial to consumers who are comfortable paying annual fees, but the long term expense can add up for those who simply don’t spend enough – and thus don’t earn enough in rewards – to justify paying $60 or $100 a year.
Consumers who prefer no annual fee credit cards, but still want to obtain sign-up bonuses, will often find that very close alternatives exist. Capital One, for example, offers a 10,000 mile bonus and charges a $59 annual fee on the Venture Rewards card. However, the same 10,000 mile bonus is available on their no annual fee VentureOne card. The no fee version offers a lower rate of rewards (1.25% vs 2%), but consumers who charge less than $10,000 a year can obtain the same bonus and net comparable rewards without taking on an annual fee burden.
3) Credit Card Debt is Even More Expensive: Cashing in on a $200 sign up bonus and earning credit card rewards can be exciting, but consumers who carry balances from month to month or may end up doing so in the near future should turn a blind eye to these promotions.
The value credit card market is full of rich deals, many of which offer greater net savings potential than rewards cards. Citibank, for example, offers three credit cards that provide 0% interest rates on purchases and balance transfers for 21 months. Other companies, including Capital One and Discover, offer similarly generous promotions lasting 15 months or longer.
While low introductory rate cards lack the aspirational allure of rewards cards, consumers who habitually carry credit card debt from month to month will likely find that the interest savings these cards provide will vastly exceed the value of sign-up bonuses and rewards.
With the holiday season quickly approaching, consumers in the market for credit cards should be careful to avoid selecting cards that offer instant financial gratification unless they are completely comfortable with the long term conditions that apply. This may require turning down a substantial sign-up bonus, but choosing a credit card that aligns with personal spending habits will provide the most value over time.