How to choose the best credit card

Best credit card

With so many credit cards available, it’s not surprising that careful thought is required to decide on the best card to choose. Many folks, especially Millennials, have a cautious attitude towards credit, perhaps due to large student loans. Nonetheless, the right credit card, responsibly managed, can provide you with features that improve your lifestyle. Even if you have no credit history, almost everyone can qualify for some kind of credit card. Read on to learn which factors to consider when choosing the card that suits you best.

Your First Card Might Be Basic

If you have a low credit score, your next credit card will offer probably offer few frills with no rewards and a modest credit limit. The good news is that there are many cards that match this description and that charge no annual fee. You can use your credit card to improve your creditworthiness by making timely payments. As you build credit, your options increase. After six to nine months of responsible use, your credit score will improve and the card issuers will be much more willing to offer you their fancier cards with more rewards and lower interest rates. It’s important to build credit / improve your credit score as this will enable you to get the best interest rates in future, and you can do this by paying off your credit card on time each month.

Cash Back, Points or Miles?

There are many different card offers out there to choose from, and many credit cards offer rewards when used to make purchases. Cash back cards offer cold hard cash, the most versatile reward. You’ll find credit cards that offer 3% to 5% cash back (or more) on selected purchases and at least 1% cash back on all other purchases. If you like to travel, you might consider credit cards that offer frequent flier miles on one or more airlines. The third type of reward, points, can be exchanged for cash back or miles, or can be used to directly purchase selected items. There are many types of credit card offers and rewards so shop around to see what the best ones are for you.

Rewards Credit Card

Some cards are better than others for rewards. Consider a rewards credit card if you want to earn loyalty points and discounts when spending with your favourite retailers. But keep in mind that these credit cards often have a high annual fee and high interest rates, so you’ll need to make sure it’s worth it.

Cards Compete by Offering Introductory Bonuses to New Members

When trying to choose the best card for you, shop around for the best sign up rewards and credit card offers. Many card issuers will pay you a lump sum sign up bonus / cash back if you use your card for a set amount of purchases in the first three months after opening the account. You might also be offered an introductory period of 0% interest on purchases and balance transfers. The period might run from 6 to 18 months. After that, you’ll be assessed interest at a specified annual percentage rate (APR) on any remaining balance that you don’t fully pay by the due date for the current billing cycle. If you’re a frequent flyer, make sure to check out which cards offer a substantial number of air-miles with your favorite airline as a sign up bonus.

No Credit? No Problem!

If you’ve never used credit, getting your first card might be tough. There are a few things you can do to make it easier:

  • Recruit a co-signer: You are much more likely to snag a credit card if you can find a co-signer, preferably one with good credit. Both you and the co-signer are responsible for payments, although typically only you will use the card. 
  • Become an authorized user: You can become an authorized user of someone else’s credit card. You can use the card as if you were the primary owner. By making payments on time, you can build good credit and then get your own card.
  • Get a secured card: Sometimes, the only way to get a credit card is to put up collateral. Many banks and credit unions offer secured credit cards. They are easy to get, because you must deposit cash equal to your credit limit. If you demonstrate creditworthy behavior, you’ll probably be offered a regular credit card within the first year.

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Better credit unlocks the best cards

Not got the best credit? Don’t worry, you’re in the same boat as many people! Although the best credit cards with the lowest interest rates tend to be available only to people with the best credit score, you can use a basic card to start building up and improving your credit score over time.

Assess whether you’ll be carrying a balance

We’ve talked about rewards quite a bit here, but if you plan to carry a balance it’s important to pay closest attention to a low interest rate instead of the sign up bonuses and rewards programs. Since credit card interest is often at least 15% annually and you’d generally earn around 1% to 2% in rewards for most purchases, it makes the most financial sense to prioritize interest rate over rewards when deciding which card to choose.

If you find a credit card that offers a promotional 0% APR on purchases and you can pay off your card before the promotional rate expires (or you can do a balance transfer before the rate increases) you won’t have to pay any interest at all.

You may want to consider a balance transfer card if you’re trying to consolidate credit card debt or reduce interest paid on existing debt. If you’re wondering what a balance transfer is, don’t worry – it’s a common question! Moving debt on one card to another card — usually a new one — is a balance transfer. Many credit card companies waive balance transfer fees (which generally range from 3% to 5% of the transfer amount) to encourage you to choose their card over other cards. As we mentioned earlier, they might also offer a promotional 0% APR for an introductory period (usually between 6 to 18 months) where no interest is charged on the balance. But don’t forget, you still have to make the minimum monthly payment on the card before the due date to keep that 0% rate.

Travelling abroad? Watch out for foreign transaction fees

If you’re the jet-setting type, or often buy things online that are sold in a different currency, be wary of foreign transaction fees. Many cards will charge an extra fee every time you make a payment in a foreign currency. If a substantial amount of your spending will be in different currencies, look for a card with no foreign transaction fees.

Business or Personal?

It’s worth mentioning that if you’re planning to take out a credit card to make purchases for your business, you’ll probably want to look at business credit cards instead of personal cards. There are pros and cons, but generally if you’re a business owner it makes sense to keep your business finances separate with a business card instead of spending on your personal card. These do usually have higher annual fees and interest rates than a personal credit card, but they’ll often have a higher credit limit and other beneifts. What is a balance transfer credit card? Many credit card companies waive balance transfer fees (which typically range 3%–5% of the transfer amount) to entice cardholders. Often, they might also offer a promotional or introductory period of six to about 18 months where no interest is charged on the transferred sum.

Understand All the Card’s Features

Some cards offer high bonus rewards on purchases from selected types of merchants, and some of these cards rotate the merchant type each quarter. If you accept a credit card with rotating merchants, remember to activate your participation each quarter if you want to earn the high rewards. Some cards that charge an annual fee will waive it for the first year. The annual fee might range from $49 to $500 or more. Cards can offer all type of benefits, such as free car rental insurance and free baggage check-in. Often cards with the highest rewards will often have the highest annual fee, so keep an eye out on that. Read all the fine print before choosing which card to get. 

Use it wisely

Choosing the best credit card is important, but don’t forget to use it in the right way in order to get the most out of it.  If you’re trying to improve your credit score, pay your bill in full every month and don’t exceed your available credit. If you were able to get an 0% APR deal, stick to your debt repayment plan in order to pay it off before interest kicks in. And if you decided the best credit card for you was a rewards card, make sure you figure out how to claim all the rewards you’re entitled to (for example, some reward schemes encourage particular uses, such as grocery stores or restaurants or travel) and pay off your bill each month to avoid incurring fees that offset those rewards.

Keep this in mind

Applying for lots of cards or regularly changing cards can actually have a negative effect on your credit rating. Every time you make an application for a new card, it’s recorded on your credit file. Your credit file will also show if any of your credit card applications are refused. This file is the basis of your credit rating, so when card issuers check your credit file, it can look like you have lots of cards already or that no one else wants to lend to you.

Credit Cards Should Integrate with Your Financial Plans

Your credit card usage should fit into your savings and investment plans. It’s important to avoid chronic large credit card balances that compromise your ability to save for your retirement. If you are thinking of getting a credit card, use it as an opportunity to work with a financial planner. Together, you can work out a holistic strategy that helps you build wealth and reduce financial risk.

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