How to Choose a Credit Card
Credit cards can be a great tool to improve your finances. If you know how to choose a credit card, you will be assured of years of financial success.
4 rules for choosing a credit card:
With all the cards out there, how do we choose the right one? We recommend four simple steps.
1: Get the Best Card You Can With Your Credit Score
Your credit score determines whether or not you have access to the nicer credit cards.
Even if you're just starting out or have had a breakdown along the way, don't be discouraged by the nicer cards. As long as you start paying off your cards every month and keep track of all your debts, it is certainly possible to get a sufficiently high credit score for the best cards.
Whatever card you need to get started, use it for a few years and build up a solid credit history. Then try applying for a slightly nicer card and do it again. After about ten years you should be able to get any card you want.
2. Decide on Simplicity vs. Maximization
Let's assume you have a good enough credit score to get just about any card you want.
So what then?
You will have to decide what is more important to you: simplicity or maximizing the value of the rewards.
If you want simplicity, you'll get a cash back card. You get a simple percentage back on every purchase you make and there's nothing to manage or remember. Super simple.
Now if you want to maximize the value of your rewards, you want to get a travel rewards card. These give you points for every purchase you can redeem for plane tickets, hotel stays and some stores. Each point system is a little different and redeeming points is always more complicated than getting basic money back. But for the extra effort you get more value from it.
The only exception to all this is if you don't like to travel. Travel rewards cards focus on people who travel. So if you don't travel at all, stay with the cash back card.
3. Factor in the Number of Cards You Already Have
If you are building up your credit, I advise you to have one card. Don't get new cards until your credit has improved and you are ready to upgrade to a better card.
At the point where your credit score is good enough to get a good reward card, start with one general reward card that you will use for everything. Choose a cash back card that has an above average cash back percentage on all purchases. Or a travel rewards card with a good points program and some nice extras. Don't make it too complicated.
Once that feels comfortable, feel free to expand to 2-3 cards. There are a few reasons to do this:
- Maximize the rewards in the different spending categories. You can put the gas spending on one card and travel on another card to get bonus points on different cards.
- Add extras. Airline cards have great perks, just like hotel cards. If you travel a lot, take a good look at these cards.
- Flexibility with points transfer. Each points program has a different set of partners to which you can transfer points. If you want complete flexibility when it comes to being able to book airline rewards for example, having a Chase and an American Express card maximizes your partner's coverage so you can book the exact airline or hotel you want.
I still recommend keeping things simple, even if you're considering having multiple reward cards. Rotating points categories, point hacking games, and cycling through card sign up bonuses are more rewarding than they are worth.
If you are a business owner, repeat the following steps
Finally, if you have a business, you want to repeat this process for your business credit cards.
Even a sideways rush or a hobby business needs to keep business and personal transactions separate. That makes keeping track of taxes and costs a lot easier. And since you still need to separate everything, why not run all your business transactions through a corporate credit card and get a lot of rewards along the way?
The same general rules apply as for personal cards. First, decide whether you want to maximize the rewards or whether it should be simple. Cash back cards are best for simplicity, travel cards are better for maximization. Second, start with one general rewards card that can cover most of your expenses. Then consider extra cards if you really want certain extras or if you want to maximize the value of rewards even more.
4. How to choose between different types of cards:
The first credit card was simple. Banks provided a card with a line of credit. You charged it and then paid for it. That was it.
Today, things have become a little more complicated. There are travel cards, student cards, payment cards, business cards, and much more.
What type of card is right for you? What are the pros and cons between them all?
We've got it all figured out below, so you can choose a credit card that's perfect for you.
Cash Back Cards
A cash back credit card gives you back a percentage of everything you spend.
Cardholders usually receive between 0.5% and 2% of the net spend as an annual discount. Most people use it to pay for future expenses on their card. Some cards also allow you to receive the discount as cash.
It's like getting a permanent discount on everything you buy with that card. Because most cash back cards do not have an annual fee, it is free money.
PRO: Cash back cards are super easy. You don't have to do anything to get your money back. The discount appears automatically. For a reward card it is as simple as it gets.
CON: Never use the money back as an incentive to buy more than you would normally do. If you carry any interest on the card, you will lose more money than you will ever get in cash. Also pay attention to the foreign transaction costs, many cash back cards have those.
Travel Rewards Cards
This is the other main type of rewards credit card.
Travel rewards cards follow the same concept as the cashback cards, except that users collect points or miles instead of cash. These points can be redeemed for flights, hotel rooms, Amazon purchases or in some cases even cash.
Some of them also come with great benefits such as access to the airport lounge, free nights, roommate rates, travel credits and Uber credits.
PRO: If you enjoy travel and want to maximize the value of your rewards, you will receive a travel card. You will get a better return than a standard cash back card.
CON: Most travel cards include an annual fee to get access to all the extras. These fees range from $100 for mid-tier cards to $600 for top-tier travel rewards cards. You will also have to put in more effort to spend your miles/points. Finding the right flights and hotels can take some work as you try to maximize their value.
Balance Transfer Cards
This type of credit card allows the user to transfer a balance from one credit card to another.
The new credit card company usually offers a promotional or introductory period - usually six months to 18 months - where zero percent interest is charged on the amount transferred. They hope you forget the balance, increase spending and then start paying interest when this period is over.
PRO: If you have a balance with you, these cards can give you some relief for a short period of time. If the money is really tight, they are an option.
CON: Credit cards are a pretty awful deal if you have a balance. Interest rates are crazy high. Balance transfer can help in the short term, but they are not a real solution. Your real goal should be to get yourself to pay off all your credit cards in full every month. Then the credit cards start to work for you.
Premium Credit Cards
Premium credit cards, often called black cards, charge an annual fee, but offer cardholders many exclusive benefits.
Premium cards are often seen as a symbol of status and offer a high credit limit and various extras that are difficult or expensive to find elsewhere.
PRO: A popular advantage of premium credit cards is the 24-hour concierge assistance with tasks such as booking travel reservations, hotels, flights, as well as activities such as show tickets, restaurant reservations, home emergencies, car breakdown and many more.
CON: Premium credit cards are aimed at consumers with excellent credit and people who fall into a certain income group. For these reasons, many users do not qualify for these types of credit cards.
For users with incredible credit and earning a healthy salary, premium cards come with fantastic extras, but significant annual costs usually start at $500.
Corporate Credit Cards
Business credit cards are intended for entrepreneurs, regardless of the size of the organization. They are an option if you are generating any form of ancillary income.
They usually have a few perks for businesses.
PRO: Cash back categories and perks for businesses. You also don't need a real business, you can get one in your name if you're generating an income yourself.
CON: Getting a business credit card can be a little more complicated than a personal card. You may also have to agree to a personal guarantee. That means that if the company cannot pay, your personal money must be used to pay off the card. Depending on the size of the credit limit and your business this can be a huge commitment.
Student Credit Cards
Student credit cards are mainly sold to people at school who do not yet have a credit card in their own name.
Student credit cards are a great way to solve the "not being able to get credit cards without a credit card history" problem that everyone starts with.
PRO: The requirements are less strict, you are much more likely to get approved.
CON: They usually don't have any rewards or benefits. It is a no-frills card.
The "Plain Vanilla" Credit Card
The standard or "plain vanilla" credit card is exactly as it sounds. There is no cashback, no fees, no rewards for use, and no real benefits in addition to an extended line of credit.
PRO: These standard credit cards typically get a lower APR than other cards. They are also usually easier to obtain and come in handy as an "emergency" payment option. If you can't get approval for a reward card yet, it's a good idea to start here and build your credit history.
CON: There are no extras for expenses. In other words, the cards work like a debit card as long as you pay for them in full each month.
Petrol Credit Cards
These cards offer bonuses and extras for people who visit a gas station. Many of these cards are connected to a single brand petrol station, such as Shell.
PRO: A good way to maximize the reward if you spend a lot of money on gasoline.
CON: Most petrol cards target specific brands of gas stations, limiting the rewards for longer rides. It is better to find a cash back card that gives a larger cash back percentage for the whole spending category on gasoline.
Retailer Credit Cards
Maps of certain companies such as Macy's, Walmart, Target and more. They usually provide shop-based extras that you can't find anywhere else. For example, the Nordstrom card helps you get early access to the annual Nordstrom anniversary sale.
PRO: Exclusive benefits and rewards for one of your favorite stores.
CON: Unless you spend an exorbitant amount of money with a single retailer, you'll almost always be better off getting a standard rewards card to use in all stores. Some of them are also "closed loop", which means you can't use that card outside of the store. The cost can also be much higher than that of typical credit cards.
Airline Credit Cards
Airline credit cards can be great if you are a frequent flyer. Almost every airline offers multiple credit cards. The higher the annual amount, the more extras you get when you fly with that airline. Benefits include priority boarding, free checked-in bags, discounts on in-flight purchases, fares for escorts, and lounge access.
PRO: Perks and extra miles when flying with that airline. If you fly regularly, I consider these extras essential.
CON: Some of the best benefits, such as extra miles and lounge access, require you to purchase the ticket on that card. They also all have an annual fee. So if you fly many different airlines like me, it will try to get credit cards for all of them.
Hotel Credit Cards
The major hotel chains (Hilton, Marriott, and Hyatt, and IHG) offer multiple credit cards. The standard perks can be great, such as getting a 5th night for free when booking.
But the real perks come from the loyalty status they help you achieve. Having a card can get you credited 10-15 nights to your status each year. Once you unlock the higher status levels, you can get great benefits such as room upgrades, free gifts and late check out.
PRO: Makes getting status with the major hotel chains a lot easier, unlocking some incredible perks. You will also rack up a ton of hotel points when spending at the hotel.
CON: To get most of these cards, you really need to choose a single hotel chain and stick to it. If you prefer to try new hotels like me, the value is much more limited.
The ultimate question: Travel expenses or Cash Back?
Generally there are two types of rewards offered with credit cards: travel points or cash back. But which one should you choose?
If you want to get every possible dollar of rewards, travel rewards programs always beat cash back cards. For credit card companies, there is always a percentage of people who forget to spend their points so that they are able to increase the value of their points compared to a more simple cash back program.
Of course, you don't get a travel points card if you hate travelling. That would be... useless. It's still worth it as long as you travel once a year.
However, maximizing the value of your rewards does involve additional costs. You will have to manage your points. They will end up on your credit card account and you will have to make choices about when and where you want to spend them. For example, different redemption methods have different values. The American Express Membership Rewards points are worth $0.07 on Amazon and $0.10 on Uber. Each card has its own redemption methods with its own values.
You could use the rule of thumb to always redeem your points for miles on an airline program. This is a good rule, and it will usually maximize the value of your points. But you still need to transfer your points to miles. Any credit card points program will be transferred to some airline programs and not to others. And once you have your points in the correct mileage program, you'll have to deal with the point restrictions your airline has (blackout dates, only certain flights that are available, etc.). To make things even more complicated, some credit card programs allow you to book flights and hotels directly through these programs, but then there is a separate set of restrictions and point values that you will have to deal with.
Sounds like a pain? It is.
For me, the extra hassle is worth the free international flights I've been able to get.
If the extra hassle of a travel rewards program sounds tiring, you get a money-back reward card instead.
Cash back cards still have a lot of advantages without work:
- You get a right percentage back on all costs of your card.
- The cash back appears on your statements automatically or with little effort. In the worst case, you have to log in and press a button to get the money back.
- While some cashback cards have maximum payouts, rotating categories and other nonsense, there are plenty of cards that keep things ultra simple.
It is as simple as it gets.
Here's how to make a decision:
- To maximize the value of your points, you get a travel rewards card.
- To maximize simplicity, you get a money back card.
Was this article helpful?30 Posted by: 👨 Joseph N. Lewis