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Pick the best credit card for your needs at The Smart Investor. Compare a variety of card offers for balance transfers, rewards, cash back, low interest, airline and more
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If you’re considering applying for a credit card, you may feel a little overwhelmed by the sheer variety of options. So, here we will look at how to compare credit cards and find the best one for your requirements.
The first place to start when comparing credit cards is to look at the different types of cards. There are a number of different types of cards that not only offer different features, but it will affect how you can best use the card.
Cash Back: As the name suggests, cash back cards provide a percentage of cash back on your card spending. Some of these cards offer a percentage on all your spending, while others have a tiered system that you can tailor to your spending habits. For example, you can earn 3% on grocery shopping, 2% on entertainment, and 1% on all your other spending.
Travel: If you travel frequently, then a travel credit card could be a good choice for you. You’ll accumulate miles on your spending that you can then redeem for hotel stays, airfare, or other travel costs. Some travel cards also have introductory bonuses or additional miles for spending in certain categories.
Point Rewards: Like cash back or travel cards, point reward cards allow you to accumulate points on your card spending. You can then redeem your points for rewards such as gift cards, merchandise, or travel. Some companies also allow you to redeem your points for charity donations or exclusive events. Issuers typically set redemption prices and offer different reward options.
No Annual Fee: Many issuers charge an annual fee for the use of their credit cards. This is typically offset for higher rewards or other bonuses. But, you may prefer a no annual fee card, so you don’t need to calculate your rewards to ensure you offset the fee each year.
Low Interest: The interest rate is usually the first thing that you may look at when you compare credit cards. Low-interest cards tend to appeal to those who carry a balance on their cards regularly, as you will incur fewer interest charges on your spending.
Balance Transfer: If you want to pay off your existing credit card debt, a balance transfer card can be beneficial. These cards typically offer a lower rate for a set period, giving you a little breathing room to bring down the balance without paying high interest fees.
Carrying a credit card balance can be a massive impediment to financial health. However, there are 0% credit cards that allow you to pay down your debt without incurring interest within the introductory period.
As you can see from this FED Survey of Consumer Finances data chart, the age group that tends to carry the highest credit card balances is the 75 and older age group with $8,000 on average. This is closely followed by the 45 to 54 age group with an average of $7,670.
0% Introductory Rate: If you don’t want or can’t pay off your card balance immediately, a 0% introductory rate card will allow you to avoid interest charges. This can also be a good choice if you’re planning on making a large purchase and want to spread the cost. Cards typically offer a 0% intro rate for balance transfers and purchases for 12 to 18 months.
Build Credit: When you have limited or poor credit, you will need a secured card that aims to help you build credit. These cards typically require a cash deposit that is often equal to your credit limit. This differs from a prepaid card since you still need to make payments. Additionally, the issuer will report the card activity to the credit bureaus.
Student: Students typically have limited credit histories and income, so student cards help to build credit. These cards typically have modest rewards and credit lines, but they typically have better rates compared to subprime cards. The cards usually have additional perks rather than paying with a debit card or cash. So, you can learn about using a card responsibly and start building a good credit score.
Hotels: If you tend to travel and typically stay with one hotel chain, a hotel credit card can provide you with some great perks or rewards. You will earn loyalty points each time you use the card. You can then redeem your points for future stays.
Airline: Airline credit cards are often overlooked in favor of other types of rewards cards. But they can offer some superb advantages. Many airline cards offer generous welcome bonuses, and the reward programs are usually more flexible. You can take advantage of benefits such as priority boarding, free checked bags, or companion tickets to obtain great value from the card.
Gas: Finally, there are cards that are geared towards those who want to save money at the pumps. These cards offer bonus points or larger rewards on your gas station purchases. So, if you use the card correctly, the rewards are like getting a discount on every gallon of gas you buy. This can add up to significant savings on your household expenses.
As we have demonstrated, there are lots of types of credit cards. So, how do you choose the best card for you? Since your circumstances and requirements are unique, you will need to ask yourself some questions to determine the card best suited to you.
The first thing you need to assess is your credit. Each issuer has specific credit score requirements for their cards, so you need to be aware of what cards will be available to you. In fact, applying for a credit card that requires a score higher than you have could actually damage your score.
Generally, the better your credit score, the greater the chances of being approved for a card with better benefits. If you don’t know your score, it is worth getting your FICO score or checking with the major credit bureaus.
Next, you should think about how you spend your money. Look at your bank statements and receipts to work out where you typically spend the most money. If you’re considering a reward card, you may need to select your categories when you apply. So, you need to choose the areas where you will gain the best rewards or benefits.
Many people ensure that they fully pay their card balance every month, while others carry a balance on their card. Whichever personality you are will have a great impact on the best card for you. If you typically carry a balance, having a lower rate will be far more beneficial than more generous rewards.
This may seem a little strange, but you need to think about why you need a new card. Generally, there are three types of card; those that improve your credit, those that provide rewards, and those that save you money on interest. This means your motivation will influence the best type of card for you.
We’ve discussed the different types of cards above, so think about how each would mesh with your spending habits and financial circumstances. If you have excellent credit and don’t typically carry a balance, a generous reward card will provide benefits for your usual spending. However, if you need help to get your finances or credit back on track, you would be better suited to a 0% or low rate card or even a build credit card. There is no point in getting a card that doesn’t meet your needs.
It is also important to look at what fees are associated with specific cards. While the interest rate is vital, you also need to check what annual fee applies. Assess how the annual fee impacts the card rewards. So, if your card’s annual fee is $99, you will need to accumulate rewards with a greater value to make the card worthwhile.
Finally, you need to think about how easy the card is to use. You may quickly find yourself feeling frustrated if you fail to maximize the card rewards simply because you forgot to change something or you misunderstood the way the card works. If you’re not financially savvy or just want to keep things simple, you may prefer to opt for a card with slightly less attractive rewards, but you don’t need to strategically plan all of your purchases.
Once you have narrowed down your preferred credit cards, you will need to compare your options. There are several areas that are important for comparison. These include:
These are just six points of comparison, so it is important to thoroughly read through the terms and conditions of each card to make your comparison. Don’t be dazzled by a great introductory rate or massive bonus, if you’ll get stung with hefty fees or a massive standard rate later.
Be realistic about your spending habits and when comparing cards, look at which card is best suited to your specific spending. If you don’t tend to travel, there is no point in a card that offers miles, even if the reward rate is generous. You will be better suited to a card that gives you rewards for your everyday spending or has a more attractive interest rate.
Finally, think about how the card will benefit you. Will it help you to build your credit? Spread the cost of a large purchase without incurring hefty interest costs? Or provide rewards for your everyday spending.
Think about which card will provide the best benefits for you.
Many people are concerned that having multiple credit cards may impact your credit score. However, having more than one card could actually improve your credit score. Multiple cards will make it easier to maintain a low debt utilization ratio.
For example, if you have one card with a $1,000 limit, and you have an average balance on the card of $750, your debt utilization ratio is 75%. However, if you have three cards, each with a $1,000 limit, and that same $750 balance is spread across the cards, your ratio will drop to 25%.
In the first scenario, this high ratio will impair your credit score. But, you will need to handle your credit wisely to manage multiple cards. You will need to keep track of payment dates and ensure you spread your spending across the cards to keep your ratio as low as possible.
There is no simple answer to how many cards you should have. Your situation is unique, so you will need to think about whether there is an argument for having another card. Remember that even having just two cards could be too many if you don’t need them or can’t afford your bills.
Although getting a new card may improve your credit score, it is not a good idea to apply for lots of cards in a short period. Card issuers have rules to prevent consumers from trying to sign up for lots of cards to chase bonuses.
Having multiple cards could also present you as a risk to lenders. Even if you have paid off all the cards, a large amount of open and available credit could be perceived as a potential liability to a lender. So, only opt for cards that you can justify and need for your finances and reward aspirations.
There are a number of times when it is a good idea to apply for a new credit card. These include:
When You Start College:
Many financial experts recommend starting to build credit as soon as possible. When you turn 18 or are planning your college journey, it is a good idea to open your first card. Student cards are a good option to establish credit and enjoy a modest credit limit. There are even cards that offer incentives to maintain your grades.
To Rebuild Credit:
If you have had some credit issues in the past, a secured card can help you to rebuild your credit and raise your credit score. Secured cards offer options for those with less than perfect credit scores and typically have better qualification requirements compared to other types of cards.
To Manage Your Debt:
If you are struggling with bringing down your credit card debt, a new card with attractive balance transfer terms could help. There are cards with low or 0% interest for up to 21 months. This will allow you to pay the same amount, yet bring down your balance, since you won’t need to pay costly interest charges.
In this chart using data from Urban Institute, you can see that the age group 43 to 47 carries the highest average credit card debt. This age group has almost double the credit card debt of their under 32 year old counterparts or seniors aged 68+.
You’re Planning a Big Ticket Purchase:
If you’re thinking about making a large purchase, a card with a 0% introductory rate will allow you to spread the cost without paying interest. If you assume an average 16.97% APR rate, a card with a 0% intro rate for 15 months, you could charge $3,000 and make $200 monthly payments. This would save you approximately $396 in interest costs.
There is a Superb Welcome Bonus:
Finally, you may find there is a superb exclusive offer or welcome bonus. This could enhance your rewards for the first few months after you open an account, providing you meet the spending requirements. However, this is only a good time to apply for a card if you can easily meet the reward requirements.
Visa and MasterCard work exclusively as network payment processors. However, there are some similarities and differences.
Both companies do not directly issue cards to the public. Instead, they partner with partner member financial institutions. These institutions then issue cards for businesses and individuals.
The key difference between Visa and MasterCard is the payment network itself. MasterCards will not work on Visa’s network and vice versa. Visa currently has a network of approximately 28 million merchants, while MasterCard’s is slightly larger at 30 million merchants. This means that it is rare that a Visa card is not accepted when MasterCard is or vice versa.
The other differences typically come from the type of card that you have. Not all Visa cards offer the same benefits, and likewise, not all MasterCards have the same charges and fees.
If you want to get the best benefits from your new card and protect your credit rating, you need to properly use your credit card. There are a number of rules you should follow to accomplish this.
You’ll receive a bill for your card every month. This will detail both the statement balance and minimum payment required. You must ensure that you make at least the minimum payment each month by the due date.
Late payments will not only incur fees but also appear on your credit report and be a red flag to potential lenders.
If you’re not confident that you will remember to make a payment on time each month, set up notifications. This will provide an alert for your statement issue date and due date. You can also set up automatic payments. But, this is only a good idea if your bills are typically consistent, otherwise, you may risk your checking account becoming overdrawn.
Credit cards typically have high interest rates, but you can avoid paying interest if you settle your bill in full each month. Almost all cards have an interest free period between the statement date and the account due date. So, if you pay the entire balance by the due date, you won’t incur interest.
The only exception to this is if your card has a 0% introductory rate. Since you will have several months to spread the cost of your purchases without paying interest. However, it is important to have the balance paid off before the introductory period ends.
Each month, credit card issuers report your activity to the three major credit bureaus. This not only includes whether you’ve made your payments on time, but also your credit utilization ratio.
This ratio is how much you owe in relation to your credit limit. So, if you have a $1,000 limit and owe $100, your ratio will be 10%. With the same limit, but a balance of $900, your ratio would be 90%.
This chart created with Experian data shows that those with an average to good credit score have an average credit utilization ratio of the optimum 33%. This ratio drops significantly for those with very good and excellent scores.
At the other end of the scale, the chart shows that those with poor credit scores typically have a very high credit utilization ratio, with an average of 73%. This will be a massive factor in lending decisions for those in this group.
Financial experts recommend keeping the utilization ratio below 30% to maintain or improve your credit score. Aim to only charge what you can pay each month. If your ratio is high, try to pay down the balance before your statement closing date.
It is usually possible to pay bills using a credit card, but it is not generally a good idea. This is particularly true if your bills are large. Unless you will be able to pay off the charges when your credit card bill arrives, you should avoid paying large bills with your card.
Most utility companies allow you to pay by credit card, but you may incur a small fee. This can be offset if you have a rewards card that will allow you to earn points or cash back on the bill. But, unless you can pay off the charge, you will incur interest.
One type of bill that cannot usually be paid with a credit card is paying another credit card. Typically, you can’t pay one type of credit with another. The alternative would be a balance transfer, but this usually incurs a balance transfer fee.
Your card issuer is unlikely to have an impact on whether your card is widely accepted or not. The acceptance comes down to the network attached to your card.
MasterCard and Visa are the most widely accepted credit cards. These two payment processors have the largest networks at approximately 30 million and 28 million merchants respectively. These networks also offer payment options, both domestically and abroad.
Cards such as Discover and American Express are often not accepted overseas. In fact, American Express has the lowest acceptance rate. So, if you’re traveling, it is a good idea to carry a MasterCard or Visa back up card to avoid problems.
J.D Power offers the most comprehensive and independent study of credit card satisfaction. The study aims to help consumers and issuers to understand user opinions and ratings of the largest bands. It covers terms, benefits, services, communication, rewards and more.
In the current 2020 survey, American Express achieved the highest rank in the national issuers category. This brand had an overall score of 838 out of a possible 1,000 points. It was followed by Discover and Bank of America with 837 and 812 respectively.
Choosing a credit card can feel a little overwhelming, so here are some tips to help you select the best cards for you.
The best tip for selecting a credit card has to be to check your score first. While you may assume that you have a good score, or recall that you had an excellent score last time you applied for credit, things can change.
You may not remember that you missed a payment last year or had a late payment a few months ago. Even something as simple as increasing your credit utilization ratio slightly can impact your score.
So, it is important to check your score before you apply for any cards. This will help you to choose a card that is appropriate to your credit score and minimize the risk of credit damaging rejections.
While many people are immediately attracted to cash back or other rewards, a low interest rate, or even a 0% annual fee for the first year, you need to assess the pros and cons of a card.
Evaluate the card as a whole to see how it could benefit you. As we touched on before, there is no point in getting a card that does not fit with your spending habits or make a positive impact on your finances.
We covered earlier the questions to ask to choose the right card. So, take the time to go through and ask these questions.
This will help you to assess whether a specific card is the right choice for your financial circumstances and requirements.
If you’re planning on making a large purchase, look for a card that offers introductory bonuses, preferential rates, and even a 0% annual fee.
Some cards offer some very attractive rewards if you spend over a certain amount within the first 90 days. So, you can not only enjoy a 0% or low interest rate, but also get a large chunk of cash back that can offset the cost of your purchase.
While there are lots of cards that offer cash back or rewards on your purchases, be sure to search out cards that offer the best rewards for your frequent spending categories.
If you typically spend most of your household budget on groceries and dining out, look for cards that provide a higher percentage in this category. If you travel frequently, apply for a miles reward card or one linked to a hotel or airline.
There are card options to suit almost every spending habit, so make the most of your typical spending to get the best rewards.
As with any financial product, making mistakes when choosing a credit card can be extremely costly. So, here are some of the most common mistakes to avoid when selecting credit cards.
Many people are attracted to cards that offer a superb introductory offer, but it can be a mistake not to read the fine print and ensure that you understand the terms. Many introductory bonuses have a timeframe where you need to spend a specific amount or you may need to take certain actions within 90 days of the account opening to qualify.
So, be sure to read through the terms and conditions, so you understand exactly what you need to do to qualify for the introductory offer.
You may assume that you can balance transfer to any new card account, but this is not always the best option. Some cards offer a 0% rate only on purchases or charge a balance transfer fee.
So, if you’re looking to transfer a balance to a card with a better rate, be sure to look for an appropriate balance transfer card. While you may not get the most attractive rewards these often have a low or 0% rate for a longer period.
If you’re unsure which card is the best option for you, you may be tempted to apply for several cards at once. However, this is a mistake. Each time you apply for a new credit card, an inquiry will appear on your credit report.
Lenders view multiple inquiries in a short period to be a greater lending risk. So, by submitting multiple applications, your credit score will actually drop.
Most financial experts recommend only applying for credit no more than once per six months. Alternatively, you can use prequalification forms that will allow you to check your qualification without affecting your credit score.
If you want a new credit card, you may think that closing out an old card account is a good idea. Unfortunately, this is not the case. The average time you’ve had credit is a factor in your credit score. So, if you have an old account that you don’t really use, it could still be helping your credit history.
For example, if you have had a card for 6 years and another for 3 years, your average credit time is 4.5 years. If you close out the older card, your credit age will drop to 3 years.
Unless you’re incurring a hefty annual fee or other charges, it is not usually worth closing out your old card.
Your credit score and credit report are two different things. Your credit score is a calculation of your creditworthiness based on the information contained in your credit report. Your credit report contains information about your current credit situation and your credit activity. So, it may detail your history of loan payments or the status of your credit card accounts.
Both your credit report and your credit score are important to obtain credit. Since your report is used to calculate your credit scores, errors on your report can artificially reduce your score. So, it is important to periodically check your report and ensure that any errors are corrected.