Credit Cards How To Use Credit Cards Wisely

How to Choose the Right Credit Card

Written by Hank Coleman

You shouldn’t leave deciding on a new credit card to chance. Ask most people how they chose their credit card, and you’ll get a variety of answers.

Some people just accept a credit card from the bank that they have done business with for years. It’s what they know. Why not just get a credit card from the bank they’ve always used?

Other people happen to pass by an advertisement, either online or on a billboard, that convinces them to apply. I recently signed up for a new credit card after receiving an email offer for reward points that was just too good to pass up.

In many cases, credit card users are almost certainly not receiving the best credit cards that are available. You shouldn’t apply for a credit card on a whim. It should be more strategic than falling for slick advertising. Here are a few things that will help you choose the right credit card the next time you apply for one.

Getting started

First, consider what type of credit card user you are. If you are the type that always carries a balance, you should look for a card with the lowest interest rate possible. Or, you may want to possibly consider a credit card that offers a low introductory interest rate at first. A low introductory offer often works well if you’re transferring a balance to a new card.

If you always pay your balances in full and on time, you would probably do better looking to maximize rewards for your spending.

Finding the lowest interest rate

Finding the credit card with the lowest interest rate is difficult for applicants because many cards only disclose a range of possible rates offered. The interest rate the lender gives an applicant varies based on his or her credit score.

When seeking the lowest interest rate, you should also keep in mind credit unions. Credit unions are non-profit institutions that exist for the benefit of their members.

For example, the Pentagon Federal Credit Union, commonly known as PenFed, was created for military personnel, government workers, and their families. Today, membership is open to anyone who is related to a qualified individual, or those who join a military support organization for a small fee.

There are a host of different credit unions around the country where you might qualify for membership. It’s often worth looking into the accounts and credit cards these institutions offer their customers.

Balance transfer offers

One strategy that many people use to reduce interest charges is to choose a credit card that includes a promotional balance transfer offer. Balance transfer offers often feature a 0% APR on purchases, balance transfers, or both, but for a limited time. These promotional periods can last for a year or more, offering cardholders incredible opportunities for savings by moving their balances to a new card.

Balance transfer offers can also be a good tool to help you get out of debt. You may want to consider combining your existing debt onto one credit card. You can benefit from focusing on your debt while also earning a low interest rate for a period of time.

Unfortunately, almost all of these cards charge a balance transfer fee of 3%-5%. Nevertheless, they can still be great products for temporarily eliminating interest payments to rein in credit card debt.

You should just take the fees into account and run the numbers. Will you save more money in interest payments than the fees the bank will charge you for a transfer? It’s often well worth the effort in many cases.

Reward credit cards

If you are the type of credit card user who always pays your balances in full and on time, then you should be using a credit card that offers rewards. Reward credit cards offer either cash back, loyalty points, or miles for each dollar spent.

Reward cards can offer points or miles in their own proprietary program or ones operated by airlines, hotels, or other companies. Cash back rewards offer the highest degree of flexibility. The cash earns interest, never expires, and you can use the cash for any purpose.

However, savvy credit card users have been able to receive even more valuable rewards by shopping with cards that earn points and miles. For example, top cash back cards may return as much as 2% on all spending, but a rewards credit card that earns frequent flier miles may return one mile per dollar spent.

After spending $100,000, the cardholder that earns cash back will have received $2,000 in rewards while the person who is earning miles will have enough for two first class domestic tickets or one business class ticket to Europe. Either of these options could be worth substantially more than $2,000.

So, it pays to understand a reward credit card’s program. Does it make more sense for you to earn cash back on your purchases? Or, do you want to earn points? Will you actually even use the points that you’re accumulating? According to a recent survey, the average American is sitting on over 61,000 reward points and doing nothing with them. Reward credit cards and loyalty points are great deals as long as you have a plan for using them.

Finally, applying for a credit card with a large sign up bonus is another way to maximize the rewards you receive from a credit card. Many cards will offer new applicants tens of thousands of points or miles, or hundreds of dollars in cash back.

To receive these bonuses, cardholders must typically spend a certain amount within a predefined period. While these rewards may feel like a free lunch, they are simply the price that banks are willing to pay for customers to give them a chance to earn their business.

Other things to look for

When choosing a credit card, fees are also an important consideration. Many credit cards charge an annual fee, but the choice is not as simple as it appears.

Often, cards even come in two versions: one with an annual fee and one without. And the card with the higher fee can represent a greater value for most customers due to its vastly increased rewards.

Another fee that varies from card to card is the foreign transaction fee. These fees are levied against all purchases processed outside the United States in any currency. Since courts have held that the bank is merely performing an arithmetic equation, these fees represent pure profit for the card issuer.

And while most banks still charge foreign transaction fees of 3%, more are offering cards without such fees. Capital One, PenFed, and Discover offer all their cards without foreign transaction fees. While other banks, such as Chase, have started dropping these fees on cards that are targeted toward international travelers.

Credit cards are a ubiquitous part of modern life, and if used wisely, they are a convenient and secure method of payment that can offer incredible rewards.

When choosing a credit card, take the time to perform an adequate amount of research and be sure to take into account your individual needs.

There are a lot of things that you should consider when choosing a new credit card. You don’t want to leave it up to falling for sheer marketing appeal. It’s best to know what type of credit card user you are, what you want to get out of your credit cards such as reward points or cash back, and make a definitive plan on the next credit card you apply to receive.

About the author

Hank Coleman

Hank Coleman is the publisher or the popular personal finance blog, Money Q&A. He’s also a freelance journalist specializing in retirement planning, investing, and personal finance. You can also find him on Twitter @MoneyQandA.

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