One of the first pieces of advice people are given after recovering from a credit crisis is to find a pair of scissors, and cut up all their credit cards. But to actually do so seems more like a denial of reality than a smart financial move.
We don’t swear off of transportation just because we survived an auto accident. Whether we drive or not, we still have to get from place to place. We don’t swear off of eating just because we get a case of food poisoning.
And it makes equally little sense to swear off of credit cards simply because we have had credit card troubles in the past. We live in a credit-based society. None of us will get very far without some kind of positive relationship with credit. We need credit.
The question is less about whether you should have a credit card, as it is, which one. Not all credit cards are created equally. Some of them seem to be designed specifically to get the cardholder into a lifetime worth of trouble. Other cards seemed to be designed to help get the holder out of trouble. Here are a few things you should consider before applying for your next credit card:
Balance Transfer
If you are already in debt, and making monthly payments on several credit accounts, you will want to start comparing balance transfer credit cards. Mostly, what you need to compare is the interest rate. But there are also the following considerations:
- 0% introductory APR periods
- larger sign up bonuses
- Additional features that make the card more convenient and cost-effective over time
You may also want to consider the reputation of the credit card company. In the sub-prime market, there is a lot of competition. The devil you know may be better than the one you don’t. That is because there are always gotchas and pitfalls with certain types of lenders.
At least you are fully aware of what you are currently dealing with. A slightly lower interest rate may hide a lot of negatives that make the deal worse than the one you have.
Credit Building
Some credit cards make it way too easy to spend lots of money on things you can’t afford, and will have a hard time paying back. By giving you a larger credit limit than you should have, they get you hooked into debt, making it difficult for you to get out of the card. Rather than building your credit, your credit gets torpedoed. Take the time to educate yourself about credit and debt.
If you are interested in re-establishing credit, or improving your credit score, as small credit limit may be the best thing in the world for you. Even if you max it out, there is no way to spend more than what you can pay back within a month or two.
Additionally, your monthly payment remains low. Your interest rate almost doesn’t matter when rebuilding credit in this way. Your timely payment is reported to the credit bureaus. And you can skip the interest by just paying it off early. This is just another benefit of the balance remaining small.
For Emergencies
It is still possible to live without a credit card. Statistically, almost one in four Americans live without access to traditional credit. It gets worse: More than half of all Americans can’t come up with $400 in emergency cash without borrowing it. Together, these lead to the conclusion that a lot of people can’t weather a minor emergency on their own, and can’t borrow their way out of it.
Having a credit card in the bottom of the sock drawer with a $400 credit limit in case of an emergency makes a lot of sense. Even if you choose to live without credit cards for typical use, an emergency card can be just the thing that saves your life, or the life of someone you love.
Whether it be for balance transfer, credit rebuilding, or emergencies, there is likely a credit card that is right for you. Make sure you get the one that best suits your situation.
