Looking for a Credit Card? Here’s How to be a Savvy Shopper
Credit card applications arrive in the mail virtually every day, and offers of “free” credit with no money down or no interest for a certain period of time bombard us on television and at the mall. It can be hard to make sense of exactly what the offer involves and whether it’s a good deal. Before shopping around for credit, it’s important for service members and their families to truly understand what they are getting into, how credit can impact their careers and the rest of their lives, and what protections are out there to shield the military from predatory lending practices.
Do You Really Need Credit?
Credit cards as we know them today came into wide use in the 1970s. Before that, there were only charge cards, and consumers had to pay off whatever balance they accrued at the end of the month. If someone wanted to buy a high-dollar item, like a vacation, camera or washing machine and couldn’t afford to pay it off all at once, they would put the item on layaway or start a “club account” at a bank, saving for big ticket items over time.
Of course, these options still exist: There are stores that offer layaway, although it may be available only for the holiday season and there may be small fees involved. In this era of online banking, it’s also very easy to start a separate “vacation account” or “laptop account” to make earmarked-saving simple.
Saving for something ahead of time is always ideal. But there are times when it is just not possible — when we need to buy a last-minute plane ticket home, or — true story — a nail rips the sidewall on a tire and it is beyond repair. Emergency funds can be a big help, but there are situations where there might be a need for credit.
Choosing the Right Credit Card
Service members should choose a credit card carefully, and not let merchants’ pressure to “act fast” sway them. Before applying, compare offers. It’s best to never carry a balance on a card, but if there is no other choice, the card with the lowest annual percentage rate, or APR, is going to have the lowest interest charges. Make sure the rate quote is not just introductory or a teaser rate that will go up later. Read the fine print to find out the penalties and fees for late payments.
The higher a person’s credit score, the more likely their application for credit will get an approval. A person with a lower score may receive a rejection or a very low credit limit.
Some cards carry annual fees or application fees, but these may qualify for a waiver under the Military Lending Act. This act, along with the Servicemembers Civil Relief Act, specifically limits the interest rate that lenders can charge military members.
The laws don’t just cover credit cards, but other types of lending as well, protecting against foreclosure or eviction and providing the right to terminate residential housing and automobile leases without penalty.
It’s always a good idea to let a lender know about military status. Even debts that predate active duty may qualify for these protections.
The Good — and the Bad
Credit cards can sometimes be a safer payment option than a debit card or cash. There are a variety of laws in place that protect credit card transactions. Under the Fair Credit Billing Act, if fraudulent or incorrect charges appear on the credit card account, consumers have 60 days to dispute them. If charges are proven to be false, the card issuer must credit the account and refund any fees. With a debit card, on the other hand, a consumer could be liable for up to $500 of fraudulent charges if the issuing bank does not receive notification of the activity within two days. Some credit cards also carry purchase protection that may extend an item’s manufacturer warranty or protect against damage, loss or theft. Some cards carry travel insurance.
Credit cards may offer rewards or sign-up bonuses, which can be a great perk. My family recently went on vacation and I was able to pay for our airfare and a couple of nights at a hotel with points from our credit card. My card also offered access to an airport lounge and paid for my membership in the U.S. Customs and Border Protection’s Global Entry program.
Responsible credit usage, which involves always paying on time, can improve a person’s credit score. However, missing payments, carrying a high balance, and applying for too many lines of credit at the same time can cause a credit score to dip.
And the value of reward points diminishes if huge interest charges are piling up because balances are not being paid off in time.
Avoid the Debt Trap
With wise use, credit cards can be a secure method of payment and a great way to build credit and earn perks. But use them the wrong way and credit cards can become a debt trap that is difficult to escape. So choose carefully!
Have questions about shopping for credit, credit scores, or managing credit card debt? Visit an accredited personal financial manager or personal financial counselor at your local Family Center for no-cost personal financial counseling!
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