How to Pick a Credit Card Wisely

How to Pick a Credit Card Wisely

When picking a credit card, no two cards are the same. What might be a perfect credit card for you might not be the best credit card for me. So how do you choose the most rewarding credit card for your lifestyle? Well it comes down to your spending habits and your credit score.

Often times, you should be looking to open a new credit card every couple of years. Experts say that you should only shop around for a new credit card every 3 years so that you can consistently improve your credit score by increasing your credit limit and avoiding too many hard inquiries in a short amount of time. The rule is 3 years because when you apply for a credit card, this involves a hard inquiry on your credit report (where if you have too many inquiries in a short period, this actually decreases your credit score) and it is easier to have only 2-3 credit cards as less cards are easier to manage. 

I have listed below a couple of the things that you should definitely be on the lookout for when trying to choose a new credit card. Although credit card shopping is not difficult, these tips will help you find the perfect credit card for your spending habits at your current credit score.

Good Credit?

If you are looking to open the very best credit cards that are on the market, you will definitely need to have an amazing credit score. If you have had past problems with forgetting to pay your bills or have defaulted previously, these cards might not be available to you. In addition, some credit cards have minimum income limits where you must make $60,000+ to be able to apply for these cards. Sometimes you might be making all of your payments on time but still are rejected; this is probably because you have not had credit for a long enough period.

If you have less than 5 years of credit history (usually for young adults who are just starting their careers), you will need to lower your expectations (at least for the moment), on what rewards you are able to get. Be aware that some credit cards charge an annual fee for better rewards so take this into account when picking out a new credit card.

Paying off your Entire Credit Card Balance Monthly?

I ask this not to judge but please answer this honestly, as it will help with reducing the amount of credit cards that you can pick from. Do you pay your entire credit card balance every month or do you just pay a small amount (most often the minimum amount due), and let interest rack up?

If you answered yes to the question above and you tend to carry a balance from month to month, than you should definitely take a look at credit cards with low APRs – annualized percentage rate – first before you start looking at cards that will give you benefits! This is because you can save a lot of money – even more than you would make with rewards – by choosing a card with a lower interest rate with no rewards. This is because if you can find a credit card with 1.99% interest, than if you are unable to pay off your credit card, the interest charged would be a bit more reasonable for your situation rather than a 19.99% interest. As an example, you have two credit cards – Credit Card A has an interest rate of 19.99% and Credit Card B has an interest rate of 1.99%. You decide to buy a new TV for $500. That year, money is tighter than you expected and you are unable to pay off your outstanding debt. At the end of the month, you would owe on Credit Card A $599.95 and on Credit Card B $509.95. By finding a credit card with a much lower APR, you were able to save $90 just on interest alone. At the end of the day, for whatever reason, if you are unable to pay off your credit card balance every month, you should definitely look at getting a credit card with a very low APR, it will save you a ton of money!

When it comes to credit cards with low APRs, do not forget to look at transfer credit cards where you can transfer a balance owed from one credit card with a high APR to a new 0% APR credit card so that you can cut down on your interest payments. Please keep in mind that these types of cards sometimes come with balance transfer fees, just make sure that these fees cost less than the interest you would save from changing from a high to a low APR.

With all of this being said, if you never carry a balance on your credit card, than taking into consideration the APR is not important. You can essentially ignore the interest rates when you begin shopping for a credit card as the interest rate is only for people who are planning to carry a balance over a couple of months.

Spending a lot of Money in one Place?

If you are like me and you spend a ton of money at the grocery store and gas station, than you should definitely take a look at credit cards that give you a higher cashback at these locations. Credit cards fall into the following categories:

Cashback – These are cards that reward you with a certain percentage of your money back from monthly purchases. These cards can have a general 1% of all purchases are paid back to you monthly or they can be a bit more specific where they provide you 3% cashback on all groceries and/or 2% cashback on gas. Personally, I have a BMO Cashback card that gives me 3% cashback on groceries and 0.5% cashback on everything else. These cards are very useful for the people who prefer to get their cashback directly deposited into their account every month and who do not want travel rewards.

Bank Rewards – These cards reward you with special points that go towards gifts that are offered to you by your bank. This can be gift certificates or items that you rack up points for through your spending and then you redeem for prizes. Usually, you will get 2 points for every $1 spent on your credit card and prizes range from 500 points to 50,000 points.

Travel – If you love to travel and want to get ‘free’ trips through your credit card purchases, than this is the reward for you! This type of credit card provides travel points (Aeroplan or AirMiles) when you spend money at specific stores and you are able to redeem them for flights. Although you are spending money to get these points, once you have enough points, it feels like you got a free trip.

No Fee – These credit cards do not charge any annual fee so if you need a credit card to help build your credit score, than you should definitely look into these no fee credit cards as they usually carry a low APR as they do not provide any rewards.

As you can see, there are many different types of credit cards, each with their own subgroup and some having two or more of the above categories. It is important to figure out before you begin credit card shopping what type of card you are looking for. You should also check and see how you can redeem your rewards, do they redeem automatically or do you have to redeem them yourself? Do your rewards expire and can the annual fee be waived if you spend a certain amount every month? If you are a young adult who just moved out and is starting to pay their own bills for the first time, I would advise you to get a cashback credit card as any extra money coming in every month would be extremely beneficial for you. If you love traveling and you are always planning the next getaway, then you should definitely look into a travel rewards card that gives you extra points when you travel to certain locations (might as well make more points while you are spending your points). Lastly, if you are just trying to build your credit score, than it is worth looking at a low APR, no fee credit card. In the end, every credit card is different and it more about finding the card that works for your lifestyle than to take a card that you end up accumulating rewards that you will never use.

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