After years of> shrinking credit limits, rising rates and new fees, not to mention government legislation, credit card users have every reason to question the value of the plastic in their wallets. And now that the dust has settled, many may find their current credit cards aren't as good as they could be.
What cards will and won't do for customers today is significantly different than it was even a year or two ago. The new legislation, for example, which applies to existing and new accounts, prohibits issuers from raising interest rates on an existing balance in good standing, requires them to put payments of more than the minimum toward the highest-rate balance first, puts a cap on penalty fees and limits credit availability to young adults. "We've seen significant changes since the CARD Act went into play," says Ruth Susswein, deputy director of national priorities for Consumer Action, an advocacy group. Credit card debts have declined, and consumers are more aware of the cost of carrying a balance, she says.
At the same time, many card companies have raised interest rates to counter the revenue-squeezing effects of the new rules. The average cash-back card now carries an interest rate of 16.62%, up from 13.83% in April 2009. For someone making a typical minimum payment on a $3,500 balance, that's the difference of more than $400 in interest over the life of the loan. And interest rates have continued to rise, despite no increase in the prime rate. "They're opportunistic rate increases," says Susswein. Card issuers have also played with other, unregulated charges, such as adding annual fees and increasing those for cash advances and balance transfers.
At least consumers once again have plenty of choices another stark change from the days of frozen credit and routine denials. Banks expect to send out 3.2 billion card offers this year, up 15% from 2010, and more than double the 1.4 billion mailed out in 2009. "Issuers are actually sending the best offers we've ever seen in 20-plus years," says Anuj Shahani, the director of competitive tracking services for Synovate Mail Monitor. As an aftereffect of the CARD Act, the attractive terms you see in pre-approved offers are also more likely to be those you get, according to a study by the Center for Responsible Lending.
Still, finding a card that offers the best of the recent changes without the costs isn't easy. Many of the drawbacks are buried in the fine print (yes, there's still lots of that). SmartMoney and a team of experts dug through the cards to find the best new ones that might be worth a place in your wallet.
Best for Managing Debt
Best Card for Managing Debt
First, some good news: consumers have less credit card debt to wrangle. The average household owes $7,490 9% less than at the recession's onset in 2008, according to Synovate Mail Monitor. Spending cutbacks have helped, but so have CARD Act provisions that allocate payments of more than the minimum toward high-interest rate debt first and forbid issuers from raising rates on existing balances in good standing, says Odysseas Papadimitriou, the chief executive of CardHub, a comparison site for credit and prepaid cards. Of course, higher interest rates overall and rising minimum payment requirements can cancel out those friendlier practices, making carrying a balance just as expensive, if not more so. And balance transfer fees now range as high as 5%, up from 3% a few years ago.
Managing debt in a post-CARD Act world requires at least two different cards: one with a good balance transfer offer and another with a low ongoing rate on purchases, just in case you can't always pay off your monthly balance, says Papadimitriou. Right now, the most generous balance transfer deals for consumers offer at least 18 months at 0%, and charge no more than a 3% fee. With 21-month offers and 3% fees, both Citi Diamond Preferred and Citi Platinum Select fit the bill. (The 0% rate applies to purchases made during the first 21 months, too.) Discover More offers more time -- up to 24 months -- with a higher 5% transfer fee. But for those who need more time to pay down their debt and don't plan to make any new purchases on the card, it could be the better deal, Papadimitriou says.
For the occasional balance-carrier, the best bet is typically the card with the lowest rate available. The Simmons First Platinum Visa currently offers a 7.25% APR, but only for people with excellent credit. For those with average credit, there are cards with average rates that cut interest rates for on-time payments and offer rewards for months you pay in full. Citi Forward cardholders see their rate drop 0.25% every three months that they pay on time and stay within their credit limit, for up to a 2% total reduction. After 0% for 12 months on purchases, the APR ranges from 12.99% to 19.99%. Cardholders also earn rewards points for good behavior, as well as five points per dollar spent on restaurants, books, movies and music, and a point per dollar spent on everything else. (Points can be redeemed for cash back, gift cards, travel and other rewards.) The higher interest rate and short introductory offers aren't the best deal if you're carrying a big balance. But the rewards, including 6,000 points for making $250 in purchases within three months and 2,500 for paperless billing (combined, worth $50 in cash or $60 in gift cards), can work out better for cardholders who only occasionally don't pay off their balance in full.
Best for Students
Best Card for Students
For people younger than 21, getting a credit card got harder with the CARD Act, which requires applicants an adult co-signer or proof of income for applicants between ages 18 and 20. That narrows the pool of available cards significantly, says Beverly Harzog, a credit expert for Credit.com. American Express and Capital One don't allow co-signers, and any card not specifically marketed to people with limited credit could saddle a young, inexperienced applicant with interest rates approaching 25%. More likely, a young, credit-free applicant applying solo will be refused, which will ding the student's credit score, more so if they immediately try elsewhere. "That makes it look like you're desperate," she says. "No lender likes that."
Even cards specifically for students can be risky. The law doesn't prohibit lenders from counting student loans and other financial aid as income. Susswein says that could inflate the offered credit line beyond what a student could reasonably repay, and continue the cycle of debt that the new laws aimed to halt. (In 2009, the average college senior graduated owing $4,100 in credit card debt, up from $2,900 in 2004, according to student lender Sallie Mae.) American Express, Bank of America, Capital One, Chase, Citibank and Discover all say that they don't factor student loans into their calculations.
The best student credit cards offer some incentives and tools to teach users how to approach credit wisely, and a rate of no more than 20%. "I like the cards that try to set good habits early on," Harzog says. Citi Forward for College Students offers the same pay-on-time rewards and interest rate reductions as the adult card (see "For managing debt") and an APR of 12.99% to 21.99%, while Citi mtvU Platinum Select Visa Card for College Students awards points for maintaining a good GPA, paying on time and sticking to your credit limit. Its APR ranges from 12.99% to 20.99%. Both allow -- but do not require -- a co-signer. (Go with the co-signer if you want a rate on the lower end of that spectrum.) Journey Student Rewards from Capital One has a rate on the higher end at 19.8%, because students must apply on their own, but offers texted payment alerts, 1% cash back and an extra 25% bonus on cash-back rewards earned each month when you pay on time. (A Capital One spokeswoman says it has the added benefit of a fixed credit limit cardholders can't exceed.)
Best for Entrepreneurs
Best Cards for Entrepreneurs
Business cards aren't covered by the CARD Act, a loophole that merits extra attention for anyone with a so-called corporate or business card. That means these cardholders won't receive advance notification when interest rates rise, and payments won't be allocated to highest-interest rate debt first. Some issuers have voluntarily adopted some of the law's provisions on their business cards, but note that the word "voluntarily" is key. "These protections could go away at any time," says Curtis Arnold, the founder of CardRatings.com. And although rates on personal cards have stabilized in recent months, business card APRs are continuing to rise, and now charge an average 16%, says Schwark Satyavolu, the founder of comparison site BillShrink.com.
Better business cards on the market require payment in full each month, offer free extra cards for employees and have some rewards. Cardholders of The Plum Card from American Express get a 1.5% discount on purchases when they pay within 10 days of their statement closing date. The balance must be paid in full each month, but cardholders can opt to defer paying the full balance for two months without incurring the usual 1.5% to 2.99% past-due penalty. And while the $185 annual fee is more than double what's typical, with the 1.5% discount on purchases for on-time payments, a business owner would recoup it with $12,335 of spending. (A spokeswoman for American Express says the issuer has adopted a number of CARD Act provisions, including 45 days' notice of term changes and a fixed monthly due date.)
Chase Ink Bold with Ultimate Rewards offers unlimited points for spending, redeemable for cash (including a $100 bonus with your first purchase) and requires payment in full each month. There's a $95 fee after the first year; a different version, the Ink Cash Business Card, has no fee but charges a rate of 13.24% to 19.24% if you carry a balance. The Ink Cash Business also offers unlimited 1% cash back, and 3% back on up to $2,000 in monthly spending in bonus categories including office supplies and dining. (A spokeswoman for Chase says business cards get the fixed payment dates and extended payment times provided for under the CARD Act.)
Worth the Annual Fee
Best Card Worth the Annual Fee
Issuers' pre-CARD Act threats to resurrect annual fees turned out to be largely bluster. A Consumer Action survey found that only 12% of the cards surveyed carried a fee, down from 21% in 2009 -- and only 16% of consumers said they saw a change in annual fees on their card in that time. Avoiding those cards that do carry an annual fee is still the right strategy for most consumers, Susswein says, especially since the average fee has increased to $65.20, up from $62.75 in 2009. Interest rates also tend to be higher than what may be available on a no-fee card. Anyone who isn't charging more than $10,000 a year and paying off the balance in full each month probably isn't racking up enough rewards and other card benefits to offset that fee.
But there can be exceptions to the avoid-annual-fees rule, depending on how you spend. Because the customers who carry cards with annual fees tend to spend a lot and don't carry a balance, card issuers have added perks and waived fees for the first year. They're also extending offers to more consumers -- you'll still need excellent credit to qualify, but if you've always wanted an American Express Centurion card, your chances are better than ever.
Which card is best depends on your spending habits -- a frequent driver will get more out of a card with gas spending bonuses than an elite-frequent flier, for whom an airline-specific card may be a better fit. BillShrink.com offers a calculator to help rewards devotees figure out which card will let them rack up more points.
For most spenders, Papadimitriou likes Venture Rewards from Capital One: The $59 fee is relatively low, and the company will waive the fee for the first year. Plus cardholders get unlimited two miles per dollar spent which, if redeemed for cash, is equivalent to 2% cash back. There's also a promotion matching up to 100,000 miles for current airline cardholders. But after the first year, you'd need to charge at least $12,000 annually to make it a better option than fee-free cards netting a more typical 1.5% cash back (usually expressed as a 1% base rate plus bonus categories).
The $60-per-year Escape by Discover also awards unlimited double miles, plus 1,000 per month for the first 25 months in which you make a purchase. Every 10,000 miles yields a $100 travel credit to your account that's $5,000 less in spending than most airline cards, many of which carry higher fees of $85 to $95. Delta (DAL)
For a Flexible Credit Line
Best Card for a Flexible Credit Line
Remember the old commercials in which a consumer wallowed in embarrassment after his card was declined? Thanks to the CARD Act, those days are back: Issuers must now get a consumer's explicit permission to spend above the limit. No permission? No approval for that transaction. Over-limit fees are also capped at $25 ($35 if you go over twice within six months), less if you went over by just a few dollars. In response, issuers including American Express, Bank of America and Citibank have eliminated over-limit fees altogether. "They're not making a lot of money doing that anyway," Satyavolu says. A Capital One spokeswoman says going over-limit generates a fee on cards that allow it, but several, such as Journey Student Rewards from Capital One (see "For students") have a fixed credit limit that cannot be exceeded. Good move, says Susswein: "Going over-limit can end up being a very costly choice."
Beyond fees, the occasional over-spender must also consider penalty rates. Consumer Action's 2010 credit card survey found that the terms and conditions for some individual cards say going over a credit limit is a factor that could trigger future rate increases. A Chase spokeswoman confirmed that over-limit charges can trigger a penalty interest rate. Other issuers, like Citibank, relaxed their over-limit policies when the CARD Act went into effect February 22, 2010.
Consumers whose monthly charges vary widely, including small business owners, should look first for a card without a limit, Arnold says. Barring that, pick one where exceeding the limit won't trigger a fee or penalty. Bank of America Accelerated Rewards American Express has rates ranging from 12.99% to 20.99% and awards 1.25 points per dollar spent. "We don't charge a penalty rate on existing balances even if the customer is 60 days past due," a Bank of America spokeswoman says, nor do they charge over-limit fees. And Arnold likes the no-fee Clear from American Express: "If you go over you limit, they're not going to ding you." Every time you spend $2,500, the issuer mails a $25 reward card.