Introduction to Credit Cards

Credit Card Advice from "Experts"

There is a divide among financial experts whether or not people should have any credit cards at all. One side says that you need to build your credit because credit is a necessity of a modern financial life, and credit can bring additional benefits (online shopping, renting a car, rewards, etc). They correctly point out that credit cards are a benefit when used responsibly.

The opposing side says that the rise in credit card debt has financially crippled hundreds of millions of people. And even though credit cards can be beneficial when used with self-discipline, many people simply don't have (and won't develop) the self-discipline that is needed to stay out of credit card debt.

One particular financial writer on the web, John Ulzheimer, who proudly claims to be "a credit expert", criticized another so-called financial expert (assumably Dave Ramsey) who advised a radio listener to follow the "no credit card" rule.

"Wow, what a great concept. Assume all of your listeners are idiots and cannot act like a responsible adult with a credit card."

Well, many people are idiots who can't act responsible. Ulzheimer's comment shows very little social intelligence. There are some people can handle credit cards and some people who can't. If there was someone you knew who couldn't handle a credit card would you recommend that they get one?

Small bank credit cards

These days, many consumers are looking to distance themselves from the large banks by moving their personal finances to the smaller regional and local banks. Although this is easy when it comes to checking accounts, it is more difficult to do with credit cards because many of the credit card programs run by credit unions and smaller banks are often outsourced to the larger banks (like Citibank or Bank of America). This is because the smaller banks can't take the risk of taking on credit card debt, as well as the fact that they don't have the operational skills and history of competing against large banks when it comes to marketing and managing a credit card business.

Credit union credit cards

Credit unions are nonprofit financial cooperatives owned by their members, and usually offer more reasonable rates and fees on their credit cards than banks. According to recent surveys, 70% of credit union members thought that their credit union put customers' financial interests above of their own, while only 58% of regional bank customers had the same view towards their financial institution. When it came to big banks, Wells Fargo had the highest customer satisfaction rating, with only 40%.

A note of caution about using credit unions: with a credit union, all of your accounts are tied together, which is referred to as "cross-collateralization". This can hurt you if you have credit troubles. It basically means that if you have a collateralized loan (such as a car loan) through the same credit union at which you also have a credit card, your credit card balance is secured by your car in the event that you default on your credit card (or declare bankruptcy).

Pros

Lower rates - According to some studies, the median interest rates on credit union cards was about 20 percent lower than on bank cards. Penalty rates on credit union cards are also lower than bank cards - 17.9% vs 28.99%, according to one study. Half of the credit union cards surveyed didn't even charge penalty interest rates - vs only 10 percent of bank cards. Federal law prohibits federal credit unions from charging interest rates higher than 18%.
Lower fees - The median late and over-limit fee was $20 at credit unions, but was $39 at banks. Only a minority of credit union cards (only 25%) even charge a balance transfer fee, compared with 88% of bank cards.
Less risk of unfair or deceptive practices - Credit unions simply care about their customers more. Because credit unions are member-owned, they aren't pressured by Wall Street to maximize revenue in order to please investors. Instead, profits on credit cards and other loans go back to credit union members in the form of lower mortgage rates and better savings account rates.
No cheap teaser rates - You are less likely to get in trouble without cheap teaser rates.

Cons

Lower (or no) rewards - Big-bank credit cards usually have high rewards (at least for those with good credit). Rewards programs are much less common with credit union cards.
More hassle to get a card - You have to become a member of a credit union before you can apply for one of its credit cards. This means that you have to belong to some qualifying group. You usually also have to either pay a fee or deposit money to join.
No cheap teaser rates - You can save a lot of money with big-bank teaser rates.

Before you apply for a credit union credit card, make sure the credit union actually has a credit card program. Only about 50% of credit unions offer credit cards. Here are a few links to get some info on credit union credit cards:

CreditCardConnection.org - A site that offers a comprehensive and unbiased screening process for finding a credit union credit card.
CULookup - A site that offers a map-based credit union locator. This is most useful if you want to see which credit union are most conveniently located near your house. This is more relevant if you are looking to do your local banking through a credit union, such as getting a checking account through a credit union along with a credit union credit card.
co-opfs.org - A site that offers a credit union ATM locator.

My recommendation

As a general rule, those who use a credit card often but don't carry a balance will want to go with a credit card from a big bank that offers cash back (unless you want to avoid big banks for ethical reasons). Although the big-bank credit cards have higher fees and rates (as well as less-consumer-friendly attitudes), these factors will not hurt responsible users.

Those consumers who carry balances will generally benefit from a credit union-issued credit card. Many users who carry a balance will be tempted to play the "balance transfer game" where they constantly transfer their balance to different cards (or new cards) so that they can stay on a 0% rate. Although this strategy can certainly work, this is not a strategy that I recommend. First, you may end up getting your balance stuck with a high rate, either because of laziness or because your transfer opportunities dry up. But even you are able to pull it off, there may be other costs. For example, by constantly having your balance at 0%, you will probably not pay it ever actually pay it down significantly, since there is no incentive for you to do so. Not to mention, you also get psychologically conditioned to think that you never have to pay off your credit card debt - which will hurt you in the long run.

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