As a Certified Credit Counselor I can’t in good faith recommend that you go out and sign up for a bunch of credit cards after your divorce. My job is to help you become debt free and stay that way. However, having some credit will be a necessary evil of rebuilding your life post-divorce and establishing a healthy credit profile will make things much easier for you.
Even with today’s economic climate in turmoil and creditors tightening the reigns, the credit card industry is still very competitive and loaded with options. To decide what type of credit card is best for you, ask yourself these questions:
- Do you plan to pay off your balance each month?
- Do you plan to only pay the minimum payment?
- Do you plan to use your credit cards as short-term loans?
- Do you plan to transfer your balances from card to card?
So, What Type of User Are You?
Pay in full
There are typically two types of credit card users; pay in full users and carry a balance users. Those that plan to pay their balance in full each month are most likely using their credit card as a method of payment; for convenience, tracking, and maybe even rewards. If you think about it as a pay in full user you are benefiting from a “free” loan each month. You have a month to pay for your purchases before interest and fees start to accrue. That is, IF you pay in FULL.
What should you look for as a pay in full user?
- Interest rate. If you pay your balance in full there is no need to be concerned with interest rates or fees. As long as you are paying your balance off monthly these features won’t matter.
- Rewards. Your focus should be on getting the most bang for your buck, in a matter of speaking. Pick a card with rewards that work for you; cash back, airline miles, points for merchandise, etc.
- Annual fees. You definitely don’t want to pay these! Find a card with no annual fees or one that is minimal and outweighed by the rewards you will receive.
Carry a balance
If you plan to carry a balance you plan to use your credit cards as a method of financing things you can’t afford. In other words you carry a balance from month to month by making only minimum payments and accruing interest. And so the vicious cycle begins…you make a purchase, pay the minimum, accrue interest, make another purchase, accrue more interest and so on and so forth. Unfortunately this is a VERY easy trap to fall into.
So, what is important to a carry a balance user?
- Interest rate. If you are planning to carry balances month to month your main concern should be the interest rate. You want a card with the lowest APR possible.
- Rewards. Typically low interest rate cards do not offer rewards as you are already receiving a low rate.
- Annual fees. You still want to avoid, if at all possible.
Credit Card Features 101
After determining your “user” type, here are some terms to familiarize yourself with:
- Annual Fees. These are just what they imply; a fee charged annually for the privilege of being a card holder. Avoiding an annual fee or asking for it to be “waived” should be explored. When considering a card with annual fees make sure the possible rewards or low interest rate are worth the fee.
- Annual Percentage Rate (APR). The APR represents the rate at which your balance is accruing interest. Interest on your card will be calculated on the basis of your average daily balance. As you are researching possible cards to consider the lower the APR, the less interest you will pay.
- Sign-up Bonuses. Unbelievable right? The credit card company will give you bonus points or some other reward just for signing up! Buyer beware you still need to watch for annual fees and high APR’s.
- Balance Transfer Fees. These fees are typically charged when transferring an existing balance from one credit card to another. Many credit card company’s offer incentives such as a zero percent introductory rate. While this is an attractive offer for someone paying a higher interest rate, keep in mind this will come at a price. Balance transfer fees can be three percent or more of the balance transferred and the zero percent incentive is usually only offered for a short period of time; three to six months or so. Make sure the new rate offsets the balance transfer fee.
- Introductory Rate. Many cards will offer a zero percent APR or a reduced introductory rate on new purchases and balance transfers for a set period of time. Sounds like a no-brainer, right? Think again this is one of the easiest traps to fall into. If you can’t pay the balance in full before the offer expires, be prepared to pay back all the debt as well as the accrued interest.
- Secured Credit Cards. Many people going through a divorce are left with poor credit or no credit history at all, leaving them in a very vulnerable situation. If you are considering divorce, now is the time to establish some credit; become a joint card holder, or open an account with your spouse’s income. If you are already in a situation with no credit history or poor credit a secured credit card may be your only option. Secured credit cards require you to make a deposit first, which then become your effective credit limit. While a secured credit card acts like a debit card issues by your bank, a secured credit card is treated by a merchant just like any other credit card. This can be a great tool for people who want the convenience and protections that a credit card offers without the possibility of going into debt.
There are many features and options to consider when choosing a credit card. By determining the type of user you will be you can make decisions that will work for you. Most importantly remember if you don’t use credit cards responsibly this useful tool may create the burden of debt; a trap that is difficult to escape.
The Divorce Coach Says
No matter how well you think you know your spouse, the end of your marriage may bring out some unexpected and unpleasant behaviors. I’ve had several women tell me their access to marital funds was cutoff by their husband. That happened to Grace and she now tells women that regardless of the state of their marriage, having a bank account and a credit card in their own name are must-haves.
Attorneys will also advise clients to get a credit card in their own name fast but finding a card that suits your needs, especially if you’ve never applied for a card before or it’s been a while, can be confusing.
I’m a “pay-in full” user and love the convenience of paying by credit card and none of my credit cards have an annual fee. Recently, I was considering the Capital One card that charges no fees on international transactions but the annual fee was $60. It was a pretty easy calculation for me to figure out that my typical overseas transactions in any year don’t come close to generating $60 in fees making it smarter to stick with my existing cards even with the transaction fees.
Suzanne is a certified credit counselor.
Photo credit: AndresRueda