Each of us relies on credit cards for different reasons, whether it is positive or negative for your finances is a different issue altogether. Some people get them in hopes of building up their credit, or to earn loyalty points or other freebies, while others rely on them for business.
In choosing a credit card, it’s important to realize that there is no one card that is better than the others. It all comes down to your personal financial story and individual preference. Just because a close friend recommends their high-interest loyalty rewards card, doesn’t mean it’s the right card for you.
It takes time to find the perfect credit card, with an interest rate and rewards program that works for you. However, knowing what options are on the table before biting the bullet can save you money and frustration in the long run. To determine which credit card is best for you, it is important to think about what you’ll be using the credit card for and what you hope to gain from it. Ask yourself the following questions:
- What is your current credit score? If you don’t know, there are many free services available. (Try not to pay to receive your credit score as there are several free resources).
- Are you using it for personal or business purposes?
- What is your annual salary?
- Do you travel frequently? Do you drive or fly?
- What are your spending habits? Do you use your credit card for daily expenses (e.g. groceries, gas, shopping etc) or only for special reasons (like travel etc.)
Determining personal preference helps narrow the options in a very crowded playing field. While you might want a credit card with no foreign transactions fees on your next vacation, if you rarely travel overseas, you might find more benefit from a credit rewards program offering free gas.
Once you’ve determined precisely what you want to get out of a new credit card, it’s time to enter the comparison phase. There are many websites that provide this service free of charge, like CreditCards.com. You will find that most of the differences or features common to credit cards fall into three main categories:
Annual Percentage Rates
Credit cards come with a wide range of available interest rates, anywhere from a zero percent annual percentage rate (APR) signing bonus to extremely aggressive rates of over 24.99 percent. If you expect to never carry a balance beyond the grace period (typically 21 days), a high-interest rate won’t bother you.
But, if you are relying on credit as a short-term loan, perhaps to pay off a larger item over a few months, its best to seek out only low-interest options. Low interest is usually considered anything under 12.99 percent.
Although more difficult to find, some credit cards exist which offer a zero percent APR bonus. It’s usually associated with a balance transfer. This means, taking your full balance from one card and putting it on to a new card. The grace period can be as long as one year before interest occurs. Read through the rules carefully, as there can be a few hidden fees and penalties within the fine print.
Fees & Additional Charges
Typically, the more benefits and features the credit card has, the higher the associated fees will be. You will notice in a side by side comparison that the more elite cards come with annual membership fees. Membership fees range from $100 – $200. It is important to do research to find cards willing to waive the first year’s membership fee.
Again, before applying, you should always scan through the contract details to find any hidden fees that could be hiding in the fine print. Some common hidden fees to look out for are:
- Late Fee
- Balance Transfer Fee
- Over Limit Fee
- Cash Back Fee
- Foreign Transaction Fee
Finally, many credit cards come with added benefits, rewards, free flights, free hotel nights, and more. Rewards should only come into play if everything else (see the points above) makes financial sense. If the interest rate, fees, and additional charges are appropriate for you, then a reward program is something to consider.
Most credit card rewards fall into three different categories: travel points, cash back, and loyalty rewards.
- Travel Points: Most travel points accumulate on points per dollar basis. Some come with added signing bonuses and perks. For example, travel points like Aeroplan and Air Miles are often based on a 1:1 ratio. One dollar spent equals one reward point. Many hotels, like the Marriott chain of hotels, also have rewards partnerships with credit card companies and give their clients a free stay every year at a qualifying hotel.
- Loyalty Points: Not a traveler? Many retailers offer their own reward loyalty programs; Amazon Prime is one of the most well-known examples. Gas stations and groceries stores are other examples of corporations commonly associated with reward point programs. Decide which rewards points you’d receive the most benefit from. Don’t forget to explore if any cards have a new customer special before you sign up.
- Cashback: If loyalty points don’t interest you, you should know that nearly every credit card company offers a cash back option. In this case, cash rewards accumulate based on the amount of money spent and are paid back in the form of a credit at the end of the year. Usually, cashback programs hover around a rate of 1-2%, but some companies run special programs which can provide you with cashback of up to 4%.
Despite the temptation, never apply for many credit cards within a short period of time as it could negatively impact your credit score, as every application for credit is a “hard inquiry”.
There are many benefits to having a card in your back pocket, but it’s easier than most people think to rack up a hefty bill. Always use credit cards responsibly and when possible, pay off the total balance at the end of the month.
What else do you look out for when choosing a credit card?