How you use your credit cards, and which ones you use, can have a long-term effect on your personal finances. Credit cards may not be at the top of the list for things to consider when it comes to wealth building, but their use can often reduce your available investment dollars by creating unnecessary expenditures through interest, fees, and more. Taking the time to learn how to choose the best credit card goes a long way toward managing your finances wisely.
According to Statista, “The credit card debt in the United States amounted to approximately 0.83 trillion U.S. dollars in the second quarter of 2018.” $830 billion of debt may be hard to get your head around, so let’s put it in perspective. A report from CNBC reported that the average household with revolving credit card debt carries a balance of $6,081. While that may not seem like enough to wreck someone’s finances, consider that if only the minimum required payment is made each month, that $6,000 of debt turns into $10,000 with accrued interest.
Choosing the Best Credit Card Requires Some Planning
It should be easy to see how choosing the best credit card and using it wisely can have a significant impact on your financial future. Start by considering why you want a credit card and how you plan to use it. Do you want to use a credit card primarily for online purchases? Will you be using the credit card for paying recurring bills? Maybe you want to spread out the cost of a high-ticket purchase. You may plan to use your credit card for all of these reasons and more, but giving some thought to how you intend to use your credit card most frequently will help point you in the right direction.
Regardless of how you plan on using your credit card or which one you ultimately choose, the key to keeping credit card debt under control is to pay off your full balance every month.
If you pay the balance off in full and on time each month, you can avoid all that interest we talked about earlier. If this is your plan, then the interest rate may not be so important so you can move on to other criteria like incentives. This best-case scenario for credit card use is great if you can pull it off every month, but be prepared for those unexpected shortfalls.If you want to use a card for borrowing, shopping, etc. and you won’t be paying off the balance each month, then you will usually have to pay interest. In this case, choosing a credit card with the lowest interest rate may be the most important factor.
No single credit card is going to give you the best solution for all categories, but by determining your intent and understanding your buying (and bill paying!) habits, you can choose a credit card that fits your needs.
Steps for Choosing the Best Credit Card
Check your credit
Find out what credit cards you are eligible for by first checking your credit score. Higher credit scores mean a greater selection of credit cards and more perks, while lower credit scores are going to limit your choices. Knowing which types of cards you qualify for will save you a lot of research and quickly narrow down your options before moving on to the next step. Wallethub is an excellent resource for finding the best ways to check that credit score.
Understand different types of credit cards.
- Cards that help you improve your credit when it’s limited or damaged. Unsecured cards for students, others without credit, and those with low credit scores are readily available but often come with high interest rates. Secured credit cards will cost you more upfront, but can often be less costly than an unsecured card overall. These types of cards are fairly easy to get but should be used cautiously.
- Cards that save you money on interest. A card with a 0% introductory rate and a low interest rate could be a good fit if you plan to use your credit card in case of emergencies, or if you infrequently carry a balance. Keep in mind that qualifying for these cards may be more difficult if you have average or poor credit.
- Cards that earn you rewards. A rewards credit card is a good match for you if you pay off your balance in full every month. These cards typically have higher annual percentage rates, but often offer considerable sign-up bonuses and other perks.
Understand what type of card best suits your bill-paying and spending habits.
- If you’re going to pay the bill in full every month, then the interest rate doesn’t matter so much. Look for the best card with no annual fees and extended grace periods to avoid those extra charges.
- If you’re going to carry a balance, you want a low interest rate and a low introductory rate. If you are going to be using the card frequently, look for a card with a generous credit limit and an incentive program.
- If you will be using your credit card only for emergencies, go for a bare-bones card with the lowest interest rate and lowest fees and penalties.
Once you have narrowed down your choices based on how you will use the credit card and how you will make card payments, you’ll need a checklist for making your final decision.
5 Point Checklist for Choosing the Best Credit Card
On a credit card offer, the interest rate is called the annual percentage rate (APR). It can be a fixed or variable rate that is usually tied to financial indicators like the prime rate, which lendors like banks use to determine interest rates. Fixed-rate cards feature interest rates that don’t change, and variable rate cards feature interest rates that fluctuate in response to economic trends.
Be aware that the rates of fixed-rate credit cards can change as a result of late payments, exceeding spending limits, or even simply because the card issuer decides to change it. Legally, the credit card issuer has to notify you of this rate change, but it’s still good to be aware that a rate increase is a possibility even with fixed-rate cards.
Annual fees may seem like just one more charge, but it’s always best to compare the overall yearly value of a credit card compared to the annual fee. Annual fees may mean lower interest rates, decreased penalties, etc. Do the math before you cross-off those annual fee cards from your list.Credit Limits
A credit limit is simply the maximum amount of money you can spend on your credit card. Depending on your credit score, your limit could be anything from a few hundred dollars to thousands of dollars. While large credit limits can be exciting, they can entice you to overspend. Whether your credit limit is $100 or $10,000, be aware that maxing out your credit limit can negatively affect your credit score.
Fees and Penalties
There are so many ways for a credit card issuer to make money off you, and they are usually outlined in the fine print that most of us don’t even read. Typical fees include transactions fees, such as balance transfers and cash advances, fees for increasing credit limits, and even fees for making payments over the phone. Common penalties include charges for late payments and exceeding your credit limit. While credit card companies don’t hide these extra charges, it’s on you to read the fine print before you sign the dotted line.
Balance Computation Method
If you’re not going to pay your full balance every month, you’ll need to understand how the finance charge is calculated. The most common method uses the average daily balance, which means that daily balances are added up and then divided by the number of days in the billing cycle. Avoid credit cards that compute the balance using two billing cycles because this will increase your financing costs.
Many credit card issuers offer rewards programs to entice consumers. You’re going to be making purchases anyway, so these rewards can be a nice perk. But be aware that those “extra” rewards may be costing you more through increased penalties and high interest rates. Make sure you understand the real value of those rewards and any of the associated restrictions and limits.
About the author: Mike Woods serves as the Financial Content Expert for FMG Suite‘s Creative Team. He aids in the creation of videos, infographics, interactive calculators, and articles to help advisors fuel their content strategies. He holds a Series 7, 66, and 24, and has submitted 1,000s of pieces of financial writing to the regulatory agency, FINRA