Choosing a credit card (whether your first or fifth card) is a very important decision, one you shouldn’t jump into. We have a love/hate relationship with credit here in the U.S. On the one hand we bemoan the levels of debt in our country. We cringe at statistics such as:
- Our total outstanding credit card debt in the U.S. is $762 billion.
- The average credit card balance is $5700.
- Average credit card debt in this country has increased by 52% in the last 10 years.
Yet on the other hand we love credit cards for a variety of reasons:
- They give us access to quick credit when we need it.
- The rewards! Credit card companies are constantly competing for customers and offer incentives for you to sign up.
- Credit cards help us boost our credit score.
The truth is credit cards are a double edged sword. They can offer you tremendous personal benefits, but are also capable of hurting you financially.
These Can Really Hurt You
With that in mind how do you choose the best one for you? Here are the factors you want to consider.
Will I Be Approved?
Most cards have a credit score range required for approval and you want to make sure you are in that range before you apply. Credit card companies cannot technically tell you if you will be approved (due to the Fair Credit Lending Act) but if you push they will give you a good idea. If you aren’t sure of your credit score check out creditkarma.com or creditsesame.com. They will both show you your score for free and they make card recommendations based on your score. Applying for any credit card (whether you are approved or not) will have a negative impact on your credit score. Don’t waste an application, make sure you will be approved before you apply.
What’s The Interest Rate?
You have probably gotten pieces of junk mail exclaiming “Your Pre-Approved! Apply Now!” urging you to get a new card. Credit card companies market so aggressively because getting just one new customer can be very lucrative for them. With the average credit card interest rate hovering at over 15% we are paying through the nose for our debt. Let’s look at how much that average $5700 balance would cost you if you make only the minimum payments. Using a credit card interest calculator we can see that:
- It would take 279 months (or 23 years) to pay off.
- You would pay $6604 in interest on top of your $5700 balance, ouch!
The interest rate a card offers you is very important, the lower the better. There are hundreds of credit cards that carry a 25-30% interest rate, watch out for those. If you ever anticipate carrying a balance, look for the lowest interest rate card you can find. Local credit unions will offer cards with interest rates as low as 8%, which is fantastic. Bigger banks tend to charge higher interest on their cards.
You will also want to check on the interest rates for other transactions. The standard interest rate quoted is for all purchases but there can be separate interest rates for international transactions, balance transfers, and cash advances.
What’s In It For Me?
Rewards can be a great perk when you get a new card, if you leverage them correctly. They can come in all shapes and sizes including:
- Cash back on purchases, sometimes up to 5% depending on the card and the specific items you buy.
- Travel rewards, to help pay for airline tickets, hotels etc.
- Points to redeem toward purchases at specific merchants.
If you are going to give a credit card company the privilege of having you as their customer, you want to get something back in return. If you have a good credit score, companies are competing for your business. Many credit cards also offer promotional offers to convince you to apply. These can include bonus cash back, a 0% interest period on purchases, or a 0% interest period on balance transfers. A balance transfer can be extremely beneficial if you are able to move a balance on your old card onto a new one with 0% initial interest.
Tread cautiously though, don’t get a card just to get the promo rewards. These are almost always connected to making purchases withing an initial time-frame, such as the first three months you have the card. If those rewards cause you to overspend beyond normal, it isn’t a good deal. Make sure that you plan to use the card responsibly long term well after the promo period.
Are There Hidden Costs?
The fine print is extremely important, make sure you read the card disclosures before you apply. There may be hidden fees or costs you didn’t realize. The most common to look out for are:
- An annual fee, some cards charge you just for having the card.
- Foreign transaction fees, if you make purchases outside the U.S.
- Balance transfer fees, if you move a balance onto this new card.
- Max balance fee, if you hit your maximum balance for your card.
- Late payment fees, these can sometimes also cause an increase to your interest rate.
- Inactivity fee. Believe it or not some cards charge you for not using them.
Card disclosures are often 20 pages plus, and for good reason. Credit card companies don’t want you to read them! Make sure you read every word when you go to apply for your card.
The final choice of what you carry in your wallet is up to you. Just like the process of setting a budget, your credit card should support what you are passionate about. These questions can help you weed out the pretenders and find the card that is best for you. If you have followup questions or would like our advice about a specific card, feel free to email us or leave a comment below.
What’s in your wallet? What cards have you found to be the best fit for your situation?