Introduction
As consumers, we cry out for variety. We want to pick and choose from among a dozen different breakfast cereals. We get a rush from selecting running shoes, car mats, computers or whatever it is we happen to need on a particular day.
Except when it comes to credit cards. There, variety gives most folks a headache. For starters, we don't tend to shop for the card we need. Instead, we wait for credit card offers to come to us, either in the mail or across the desk at our banks. And when we're faced with more than one option, we're overwhelmed. Far from delighting in the decision before us, we're dumbfounded by the confusing variety of interest rates, annual fees and reward programs.
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No doubt about it, finding the right credit card is tough — especially when you don't have a strategy. To do the job right, start by looking at where most of your spending goes. Are you a homeowner? Saving for a new car? Do you use plastic to buy anything and everything? Answer these questions and you're halfway to deciding on the right card for you.
To take you the full distance, MoneySense has once again enlisted the help of credit counsellor John Quigley from the Quinte Region Credit Counselling Service in Belleville, Ont., who advised us on the best deals in plastic in "Credit card confidential". After scouting the newest batch of credit card offerings and re-evaluating the old standbys, he's selected the top picks for every kind of spender. For his recommendations, read on.
If you carry a balance …The best way to avoid credit card interest charges is, of course, to pay your balance in full every month. But if you can't do that, your next-best strategy is switching to a card with the lowest possible interest rate.
It takes only minutes to shop for a low-rate card. For an overview of offerings that fit your spending habits, log on to the Industry Canada Web site at www.strategis.ic.gc.ca, and click on Credit Card Costs Calculator in the Consumers section. Plug in your average monthly balance and, the number of times a year you exceed your credit limit and whether you draw cash advances from your card. in moments, the site will come up with a list of low-rate cards to consider, complete with an estimate of how much each one would cost you in interest charges and fees.
You should also check out one of Quigley's top picks: the ScotiaLine Visa from Scotiabank. Set up to mimic a line of credit, it has a variable interest rate of prime plus 2%, or the equivalent of 6.5% at time of writing. As an added bonus, there's no annual fee. And unlike the cards that tout a "low introductory rate" to seduce you into switching, then skyrocket to the standard 18% after six months, the ScotiaLine Visa will never charge you more than 2% above prime.
A card like this would have saved Tanya d'Anger hundreds of dollars last year alone. "I don't like to carry money on the cards, but I do when I make a big purchase," says d'Anger, a 43-year-old teacher who works part time while completing her PhD in drama at the University of Toronto. She and her husband, David Mitchell, 64, hold five no-annual-fee credit cards, all of which charge them about 18% interest on unpaid balances. Considering that the couple has an unpaid balance of $5,000, they could save $575 in one year by switching to a ScotiaLine Visa and consolidating their balances on that card.
The only downside to the ScotiaLine Visa is that you need a good credit rating to qualify, which means that the people deepest in debt — who would benefit most by switching to the card — can't get their hands on one. So what are the other alternatives for really big spenders like Shawn Isenor, a display coordinator for Mark's Work Wearhouse in Calgary? The 36-year-old holds three credit cards, but it's his Bay department store account that worries him the most. It charges an astronomical interest rate of 28.9% annually. Buckling under his $16,000 credit card debt, Isenor is anxious to get his financial house in order.
According to Quigley, Isenor's basic strategy should be the same as the d'Angers': "The first step always involves bringing your interest rate down." Transferring the current balances from all three of Isenor's cards to a single low-interest-rate card like the ScotiaLine Visa would save him a whopping $3,600 a year. In case he doesn't qualify for a low-interest-rate card, he could try for a consolidation loan from his local bank, which is almost guaranteed to give him a lower rate than his cards.
If you pay in full every month...Since you never carry a balance and never pay interest charges, seeking out the lowest rate isn't a major concern. Instead, you'll want to insist on two things: no annual fee, and a reward for your fine patronage.
Basic, no-frills, no-annual-fee cards are abundant, so we won't bother to list them here.(For an overview, log on to the Credit Card Costs Calculator at www.strategis.ic.gc.ca.)However, we would like to draw your attention to the growing number of reward cards that let you earn points toward auto rebates, retail discounts and cash back — and do it all for free. You could pay $100 or more a year for the right to carry an ultra-high-credit-limit card that provides 24-hour travel assistance or points toward airline flights, but why would you do that when many really good reward cards let you earn perks without an annual fee?
Our favourite card from our previous credit card roundup is still one of the best deals going — if you can get it. The Capital One Cash Rebate Plus Platinum MasterCard pays a handsome 1% to 3% cash rebate on everything from groceries to hotel stays, with zero annual fees. Unfortunately, you can only apply for the card if you receive an offer in the mail, because Capital One is still "testing" it in small areas across Canada. So if you see an envelope from Capital One in your mailbox, don't toss it — give it the close look it deserves.
This year, in addition to the Capital One card, we have some new and worthy contenders to tell you about. But before you fantasize about spending those future reward points, you've got to work on your game plan. A reward card only pays off if you use it — so before you choose, it's important to think about which perks you're most likely to cash in and what some of the limitations might be. We'll walk you through a typical situation.
Say you want a card that helps you save up toward a new automobile, like Nicholas and Jeanette Bianchi of Toronto. They signed up for a GM Visa six years ago, drawn to the fact that it has no annual fee, and that for every $100 they spent using the card, they would get $5 toward a new General Motors vehicle. Sounds good so far, right?
Last April — five years and two babies later — they decided it was time to cash in their bonus dollars. "We needed a bigger car, and we had $2,500 in GM points," says Nicholas, 37. The trouble was that one of the vehicles at the top of their wish list wasn't made by GM. "We liked the Subaru Outback but didn't want to waste our points," he recalls, "[so we] settled on the GM Rendezvous."
Although they were ultimately happy with their vehicle, the Bianchis feel that the inflexibility of their GM Visa forced them to compromise on their choice. Now they're hunting for a new card that offers them the freedom to choose exactly the reward they want.
Quigley recommends that the couple consider switching to a card that will give them rewards in areas where their expenses will be biggest. For instance, the Bianchis are homeowners and they have a steady stream of renovation and home maintenance purchases in their future. The Canadian Tire Options MasterCard will reward them with discounts off everything the giant household and auto goods chain sells. Its reward program is unusually generous, offering up to 3.5% back in Canadian Tire credits for purchases made at Canadian Tire stores and gas bars, and 1% back for purchases made elsewhere. "That could translate into stuff like paint and hardware for the Bianchis," Quigley says.
His second recommendation for the Bianchis is the No Fee Citi Driver's Edge Platinum MasterCard. "They're a growing family and they will probably need a second car in the future," he predicts. Driver's Edge would reward them with up to $1,000 a year toward the purchase or lease of any vehicle — new or used — to a maximum of $5,000. That beats the GM Visa, since the GM card allows you to collect only up to $2,500 in reward dollars and that maximum amount can only be redeemed on the priciest vehicles that GM makes. If you decide to put your GM points toward, say, a $30,000-Chevy Blazer, your reward is cut off at $2,000. But if you had a Citi Driver's Edge Platinum MasterCard, you would be able to redeem up to $5,000 on any make or model of your choice.
How long will it take you to rack up $2,500 in rewards? Good question. Driver's Edge grants 2% of all purchases you make on the card, so you'll earn $20 toward your next car for every $1,000 you spend. And you have up to five years from the day you apply for the card to redeem your auto dollars, which means you must charge an average of $25,000 a year to earn the maximum.
For enthusiastic shoppers who think $25,000 a year is no sweat, Quigley has a tip on how to double your automotive discount. Get both a Citi Driver's Edge Platinum MasterCard and a GM Visa.(Since neither has an annual fee, it costs nothing to keep both, as long as you pay your balances in full and on time.)Charge enough to rack up the maximum reward on your two cards, and down the road you'll save up to $7,500 off the purchase of a new GM vehicle by redeeming the rewards on both cards at the same time. Of course, this strategy is worthwhile only if you're interested in buying from GM — but it's also the only way you can double your reward potential.
If you can't get enough of the perksLove taking advantage of reward programs? Then why limit yourself to just one? With a little bit of planning, you can juggle multiple cards to your advantage — like Anne and Tom Metzger. The Vancouver couple have a whopping seven credit cards between the two of them, and because they consistently pay all of their monthly balances in full, their expansive card portfolio gets a reluctant OK from credit counsellor Quigley. "Normally, I don't recommend people have more than two or three cards. But sometimes it can work," he says. The key is keeping your credit limits modest. Restraining your credit limits will prevent you from overspending and getting into trouble with debt.
The Metzgers have selected each of their cards with a specific purpose in mind. "I love a bargain," says Anne, who believes that holding several reward cards gives her the biggest bang for her buck. Whenever she rents a car, the Royal Bank Visa Gold card comes out, because it offers her free rental insurance. Meanwhile, her Sears card allowed her to buy a $2,000 washer and dryer on the department store's popular deferred payment plan. "I'm paying it off by making 24 equal payments at 0% interest. On top of that, I got a $50 gift certificate on my next Sears purchase. It was great," she says.
Of all the Metzgers' cards, Quigley is most enthusiastic about the Canadian Tire Options MasterCard(a choice he also recommended for the Bianchis, above)and American Express Platinum Cash Rebate Costco card, which offers a juicy annual rebate of up to 1.5% on any purchases you make at the bulk-goods chain or elsewhere. You can redeem that rebate at any Costco store. "I got a rebate of $400 last year," Anne says. Since the Metzgers already have a membership at Costco, acquiring the card didn't cost them anything.(Members can apply at any Costco store.)
The only potential catch with this card is that you get the top-level 1.5% rebate only after you've spent $5,000 in a single year, and then the rebate applies only to purchases over and above the $5,000 mark. And because American Express isn't widely accepted by vendors, you may not be able to use the card as often as you'd like. Still, Quigley allows, "it's a generous rebate." Plus there's no annual fee — an important feature, since high credit card fees can cut into or even cancel out your rewards.
A big key to the Metzgers' success is that the couple charges practically everything, not just big-ticket items. Since rewards are calculated as a percentage of your total purchases on the card, making as many purchases as possible each month will maximize the value of your reward. Just be sure you always pay those big monthly balances in full and on time-reward cards charge higher interest rates than most basic cards, so carrying a balance will cost you dearly.
The one card in her wallet that Anne regrets is her Zellers card. With every Zellers purchase, users accumulate points they can redeem for merchandise from a glossy catalogue. Trouble is, it takes forever to earn enough points for anything of value. Anne's assessment of the card is colourful: "It's a piece of crap," she pronounces. Sure, the card gives you 25 points for every dollar you spend — but you'd have to spend as much as $24,000 to cash in on a three-piece towel set worth $60, or $64,000 for a Pioneer five-disc DVD player that retails for $280. Although signing up for the store's affiliated HBC Rewards program will help you earn points faster, you'd still have to spend about $20,000 to get that DVD player. The lesson: before you sign up for a reward card, make sure that it offers something truly worthwhile.
Quigley agrees that consumers have to be careful with retail cards, and would like to see the Metzgers get rid of theirs. Otherwise, he feels they're handling their multiple cards responsibly. Just as important, they've figured out how to work their rewards program to the max.
That's the key point for any shopper. Whether you crave credit card perks, need help with high interest rates or simply want a no-fee card for occasional big-ticket purchases, you should never forget one simple rule: shop around for a credit card that fits your needs and spending habits before you begin shopping with your credit card. It's one of the smartest financial moves you can make.
