Most people can’t go through a single day without seeing a credit card ad. Whether that’s a commercial on TV, an internet ad, or even while at the checkout line at your favorite retailer. With so many cards being offered to you at every turn, and so many features to choose from, how do you find the right card for you?
Start With Yourself
Some people do a great job of keeping on top of their cards and paying them off every month. Some people struggle to ensure that their credit cards are paid off every month and, as a result, they’re charged interest and fees. If that’s you, a credit card might not be your best financial tool and you should stick with a debit card for regular purchases.
Make Sure the Benefits Outweigh the Costs
When used responsibly, some credit cards allow you to earn cash or other rewards. Depending on the card, it’s possible not to pay any interest or fees. If you’re able to find the right card and manage it well, you can ensure that the benefits of your card outweigh the costs.
Look at Interest
In evaluating a credit card, you want to make sure that using it will put you further ahead financially. The costs with credit cards are sometimes hard to decipher. Here’s a quick guide:
APR – APR stands for annual percentage rate. This is the yearly interest rate you’re charged for carrying a balance. APRs and interest rates are not the same. APRs are an annualized representation of its interest rate. Many cards compound interest on a daily basis.
Purchase APR – This is the APR that is applied to every purchase you make on your card.
Balance Transfer APR- When you move the balance from one credit card to another, this is the APR you’ll pay. Typically balance transfers don’t have grace periods (we’ll talk about later) and sometimes the balance transfer APR can be higher than the purchase APR.
Penalty APR– If you become delinquent on your credit card, meaning you haven’t made a payment in the last 60 days, you could be charged a penalty APR. Typically penalty APRs are higher than the purchase APR.
Cash Advanced APR- If you take out cash from your credit card, you’ll often be charged a cash advanced APR. Typically there isn’t a grace period (we’ll talk about this next) and therefore you will pay interest. It’s good to remember that you don’t have to get “cash-in-hand” for these rules to apply. If you transfer money off your credit card within an online/mobile banking system, most card issuers will treat this transaction the same as a “cash advance.”
APR Grace Period– Credit card issuers typically have a grace period. The grace period is usually 25 days. If you pay off the balance during the grace period you won’t be charged interest unless, as noted earlier, you used a cash advance or balance transfer. It’s important to remember that cards all work differently so reading the fine print is critical.
Fixed vs. Variable APR– Your credit card could either have a fixed or variable APR. Fixed APR means that the interest rate will stay the same throughout the life of the loan or agreement. Variable means that the interest rate can change either from the base rate and margin from the credit card issuer or from changes to the federal prime interest rate.
Look at Fees
Annual Fee– Many credit cards charge an annual fee, just for having the card. It can be as low as $75 or as high as $500. Some credit cards don’t have an annual fee and still others have introductory offers of no annual fee(s) for the first year.
Late Payment Fee– If you don’t make your payment in time, you will often be charged a fee. Sometimes the fees are as low as $20 or it can be as high as $40. The CFPB puts a cap on the fee credit card issuers can charge but it’s adjusted up every year to account for inflation.
Foreign Transaction Fee– If you like traveling to Mexico or even taking day trips up to Canada, you’ll want to pay attention to the foreign transaction fees. Typically, this fee is around 3% per transaction. Even if you aren’t traveling, making purchases on the internet or over the phone could result in a Foreign Transaction Fee being assessed if the vendor you’re purchasing from is located in another country.
Balance Transfer Fee– If you’re moving a balance from one card to another, you’ll typically pay a balance transfer fee. This is typically around 3-5%. Some cards have promotional offers of no balance transfer fees.
Cash Advanced Fees– If you’re taking cash from your card (often done at an ATM) you’ll typically pay a 3-5% fee, depending on the card. It’s good to remember that you don’t have to get “cash-in-hand” for these rules to apply. If you transfer money off your credit card within an online/mobile banking system or at an ATM, most card issuers will treat this transaction the same as a “cash advance.”
Over-the-Limit Fees– Some credit cards allow you to spend more than your approved credit limit. In some cases you can opt to approve it for a fee of around $35.
Returned Payment Fee– If you make a payment on your credit card but your bank balance isn’t enough to cover it you could incur a fee, often around $40.
Evaluate the Benefits
When evaluating the benefits of credit cards, it’s important to consider how you will use the card.
You Want Simple and Inexpensive– Some credit cards offer simple cash back. There’s no need to try to scratch your head figuring out how points apply, it’s just a simple reward for using a credit card vs. debit card.
You’re a Frequent Flyer– If you hop on a plane every year, an airline rewards card might be a good fit for you. Not only will you earn miles with every purchase, but some cards also have a free checked bag or free companion fare once a year.
You Have Excellent Credit– Some cards are only available for people with great credit. These cards can offer lower interest rates, lower fees, and better perks.
You Don’t Have Good Credit– If you’re looking to build your credit you might consider a secured credit card. Check out this article we wrote about secured credit cards.
You’re Loyal to a Particular Hotel Chain– Co-Branded cards often come with great perks such as free nights, room upgrades and more.
You Spend a Lot in Certain Categories – Some credit cards offer especially high cash back rewards for spending in different categories such as gas, groceries, and restaurants.
It All Comes Down to the Math
With so many credit card options, it can be difficult to decipher which will give you the most bang for your buck. Here’s a simple equation to help you do the math:
- How much do you plan to spend on the credit card every month?
Look at your current online banking. Consider which purchases you’ll make with the credit card.
- Look at each credit card offering to figure out what you will get for every $1 spent.
As an example, some air miles credit cards offer 1 mile for every $1 spent. The average value for each mile is 1.1 cents. Depending on the card, these miles may not expire.
- Factor in any monetary bonuses.
Continuing with the air miles credit card example, when you fly you might check a bag for free, which is a $30 value. It could also come with an annual $99 companion fare (plus $22 or more for taxes and fees).
- Does it have an annual fee?
Some air miles credit cards have a $75 annual fee.
- Total the annual financial benefit
Provided you pay off the credit card every month, and aren’t charged interest, calculate the annual value. Let’s say you charge $500 per month on your air miles credit card. That will equal 6,000 miles per year at an average value of $66. Add the value of one checked bag $30. Subtract the annual fee of $75 and you come to an annual benefit of $21, not considering the companion fare.
Alternatively, consider a 1% cash back card with no annual fee. For the same $6,000 spent, you will receive $60 in cash back with no annual fee to subtract from the benefit.