There are a thousand credit cards available in the market. Whereas, individual carries, on average, 2 credit cards. So, how to shortlist? How you’d zero in on a few credit cards from seeming an infinite number of options? Choosing a right credit card has become one of the most important topics of personal finance. But, I haven’t written up on this earlier. Let me cover every step that one must take to pick the best credit card fitting to their need.
While doing research on my next card, I couldn’t find a single article that addresses the need for consumers to find the best card on the market, fitting to his need. All I could find is the card comparison sites. There’s no systematic and full proof way to match demand with supply.
There are no resources that indicate I need ‘this’ specific card or ‘that’ one. So, this is my little effort to bridge the gap. Hope it helps.
I am not asking everyone to get a credit card. This post is only for people who know how to use their credit. First, I will explain how I chose my credit cards and then explain the steps involved.
Let me reiterate, as personal finance is strictly personal, your preference and your way of assigning the value to a credit card may be different than mine. At the same time, there are some common factors that we should consider while selecting the best credit card.
(Please Note – Opening a new credit card will reduce your credit score by a few points. But after making regular payment for few months, generally, within 6 months of new credit card opening, credit score comes back to original level. So, if you are planning for a big loan within 6 months to one year, do not apply for a new card now)
So, you want a credit card and you’re searching which one is most suited.
The first question you may ask, should I be using a credit card?
I’d say if you had past problem with raking up credit card debt, then probably you should never use a credit card again. Those who spend more than they could pay off by the month-end should never use a credit card.
For the rest, a credit card is an important financial product that I think they should possess. I don’t have problems with credit, I have four credit cards.
First question, why I use a credit card?
- I don’t have to carry cash
- It boosts my credit score, so borrowing money is easier and cheaper. I got best mortgage rate on the market and I got a 0% auto loan
- I accumulate reward points. On average we get back around $750 credit card rewards every year.
- I don’t pay a fee to own a card, they’re free
Second question, why I have 4 of them?
- Credit card rewards, which are higher than regular 1%, are cyclical and short-lived, If Chase offers 4% cash back in restaurants for the first quarter, Citi offers 3% cash back on gas in the same quarter. I use Chase to pay for meals and Citi to pay for my gas in the first quarter. Very simple
- Having multiple credit cards boosts your total credit line. More credit line with the same amount of balance reduces debt to credit ratio, which in turn boosts your credit score. This is my first-hand experience.
I have an AMEX, a Chase Freedom, a Citi Platinum and a BofA Amex cards.
So why do I have this combination and not any other? Let me explain.
BofA Amex – BofA offered me my First credit card. And you shouldn’t close your oldest credit account. After 10 Years of having this card. I can possibly think of closing it down. Also, this card has the highest credit limit and offers regular cash back.
AMEX – Due to reasons, I can’t say much about this card. Except that, I have it for their customer service and reward. I use it for Costco shopping as well.
Chase Freedom – I am so satisfied with Chase freedom that I wrote a review couple of years back. This is my go-to card for the everyday purchase. Out of $750 rewards, I think more than $450 comes from this card. Chase has superior customer service and fraud protection system.
Citi Platinum Master – Just to have a master card I applied for it. Amazingly there are places on this planet where only Master cards are accepted. This is also my second oldest account but I rarely use this card. This will become handy for Costco shopping from 2016 onward.
The only card I may consider applying for some time in future is Discover It card.
The reasons behind selecting Discover It
- I don’t have a discover card yet ,and, they were JD Power top rated card issuer (along with AMEX) in 2014
- In terms of rewards, it’s beating Chase Freedom as well
The Discover It card has actually made some serious changes in the last few months, which has me considering it even further. For example, it offers cash back on purchases and will double the cash back for new cardholders. This means that if I earned $500 in cash back during my first year of using the card, I would receive an additional $500 bonus as well. Since there is no limit to the bonus that I could receive, applying for this card and trying it out for a year seems like a good idea.
I would like to reiterate that credit cards are not for everyone. Numbers are scary. Average credit card debt per US household is $5,000+
Why everyone shouldn’t use a credit card?
When you walk up to a store with $200 in cash and no credit card, you can’t buy more than $200 worth of things. Naturally, you’ll end up buying things that you need most and fit in that $200
Whereas, if you walk into the store with a credit card having $10,000 credit limit. Essentially your buying power is $10,000. So, you may end up buying things which you don’t need. As famous Warren Buffet once said, “If you start buying things you don’t need, you’ll soon end up selling things you need“, this spells disaster.
Cards being offered nowadays have many differences from one another, including rewards programs, air miles, interest rates, options on balance transfers and many others, making choosing the right card for you a complicated decision.
I’d try to simplify the process into 5 steps or criteria, on which you can base your decision.
6 Criteria to Pick The Right Credit Card
Assess what you already have
If you have an air mile card, you’ll not need another. Similarly, if you have a card from one issuer, you may like to get a card from another issuer. This way you may get more credit limit and use your cards at more places.
Resources – Your wallet, look what you have
Examine the reward program
Credit card companies and banks are all in competition for your business. Therefore, many rewards programs have been developed to entice consumers to use their products. These programs can be a major benefit to users, and can offer a range of extras, like accumulating air miles, cash back rewards on purchases, driver’s rewards and much more.
If there’s no reward, the card is not good, move on. Even you can discard the ones that offer only 1% reward. This way all major store cards are eliminated as they have higher discount only at their stores, everywhere else they offer only 1% cash back.
Look around at available cards and be sure to select one that directly relates to you and that the benefits are something that actually could be useful to you. For example, if you enjoy traveling, you are likely to opt for an air miles card. Similarly, if your highest monthly expenditure is on gas, you may think of getting a card that gives maximum return on gas purchases.
Resources – You may get several online reviews of credit cards. Sometimes people write their experience after using the card but, most of the reviews are based on materials collected online and offline without actually using the card. I’d read reviews only on reputed sites.
I’d go to the issuer’s website and read their advertised reward program. I went to Discover reward center and read their program thoroughly. I went to that site by doing a Google search. There’s no better source to know the reward program than visiting the bank site itself.
At the end of this evaluation criterion, you have the type of card you need.
Example – Let’s say you need an “all-purpose (general) reward card”. Now the next step would be to find the best all-purpose reward cards.
Again do a search on google. There is thousands of best “general reward credit card” list available on the web. Go through those, short-list a few. Next step is to eliminate from the list, the issuing banks that you are not very interested in.
Choose a financial institution you trust
I believe in the trusted brands, that’s why I have AMEX and I want Discover next. I know, if my belongings are stolen in Rome, a phone call to AMEX call center will bring me to my home in Miami.
It is important to choose a provider that you trust and has an established reputation in the industry. Going with a major provider is a great way to ensure you are getting competitive interest rates, receiving quality rewards, and will have a positive business relationship for a long time.
Resources – There are only a few institutions that issue credit card: Visa, Master, AMEX and Discover. When you get a Visa or Master card, the brand you should look for really is the issuing bank. I have Chase Freedom Visa card. It’s reputation of Chase bank that I looked for.
Cards like AMEX and Discover are issued by them directly. So here the reputation of card issuing company matters.
So, decide if you want a Visa card from your small regional bank or you want a Visa card from a big bank like PNC, Wells Fargo, Chase, BofA, etc.
At the end of first three criteria evaluation you now know which reward card you want and from which institution. Great job! You’d probably shortlisted only handful cards out of thousands available in the market.
In the next step, we’ll compare those handful cards, head to head. And decide on a single card that will satisfy the need.
Example – Let’s say you picked two cards, Chase Sapphire and Chase Freedom. Now go to the card application site and read the terms. What you’ll be looking in the terms is mentioned below.
Interest rates and associated fees
Every individual lender and card will have varying interest rates and fees associated with the account.
Many credit card companies offer enticing introductory rates, even 0% for a limited time after activation. This can be a fantastic tool for balance transferring old debts and paying off debt quickly. However, beware of when the initial period ends – noting what the interest rate will rise to afterward – making sure they are competitive with other products on the market.
Many fees can be associated with a credit card, including the annual cost of having the account, balance transfer fees, higher interest rates on cash advances, and many other costs that will be explained in detail throughout the extremely fine print in the card documentation.
Some credit cards waive the annual fees and approach fees and rates differently than other companies, so it is important to familiarize yourself with the details.
I’d suggest you to eliminate cards in your short-list that have an annual fee. Unless you are a frequent traveler or business executive that needs a virtual concierge service 24X7, you don’t really need to pay an annual fee.
Additional cardholder benefits
Credit providers will frequently offer other benefits subsequent to the one primarily advertised. Discounts on car rentals, hotel suites, extra reward programs and balance transferring benefits are all additional pros to selecting a specific card. When choosing yours, be sure to look at what these extra benefits may be and choose one with attributes you are likely to take advantage of.
However, do remember to shop around as some deals may be better than others. If you’re looking for a home loan, for example, visit Newcastle permanent online for home loans, as they will more than likely offer a better deal than your current credit provider.
Remember – Some cards offer Miles, some points and some simply offer cash back. While comparing these cards, always convert points, miles, etc. to cash. For all cards in your consideration calculate the rewards in dollars terms when you spend $100.
Banks use many tactics to get your business. Some will give you 4 points, or 10 miles for every $1 spend. But if those 4 points (or 10 miles) results in 1 penny, then another card offering just 2 pennies to $1 is the better card.
Now lastly, again evaluate if you really need another card.
Know your credit needs
Before even investigating your credit card options, be sure to identify what your credit needs are so you will be able to make the ideal decision for you.
Factors that should be considered include the credit limit preferred, how often the card will be used, whether the card is widely accepted and what are the costs associated with carrying a balance long term if that is going to be a possibility with your card. Once you have established your credit needs, it will be easier to select the appropriate credit card for you.
If you think you don’t really have a need for another card then do not apply for the sake of it.
Readers, hope the information provided is of use to you. I’d be glad if you provide your input in the comments. How do you choose your credit cards?
Rohan Bhardwaj says
So much awesomeness in one post. As of now, my income is the not the minimum to own a credit card.
Your tips would definitely come handy.
I need credit card namely for two reasons : I might need a loan in future and I love rewards.
So for the best rewards and low interest combination card would go. Learned something new today, I would definitely keep my first card running.
You need a credit card to build you credit history, that’s what you should do. I guess you’re a student right now. Yes get the first card running till at least 10 years. thanks for the input.