How to choose a credit card
In this article
- Credit limit
- Annual fees
- Interest rate
- Credit balance insurance
- A credit card that’s right for you
Credit cards have multiple uses. They’re great for making online purchases, they let you borrow money to obtain all kinds of goods and services, and they come in handy when things unexpectedly go south. When properly managed, they also help you build a good credit history. Here’s how to choose the best credit card for you.
The credit limit is the maximum amount you can borrow. To maintain a good credit score, you shouldn’t use more than 35% of your limit. For instance, if your limit is $1,000, your average usage shouldn’t exceed $350. That’s why it’s important to choose a credit limit that’ll give you some leeway.
Not sure which limit to choose? Never had a credit card before? In both cases, it’s better to go with a lower limit. That way, you can learn to use it at your own pace and make sure you’re able to pay off your monthly balance in full. You can then increase or decrease your limit according to your needs.
When it comes to choosing a credit card, you have two options:
- A card with no annual fee
- A card with an annual fee
Typically, cards with no annual fee come with a higher interest rate and fewer perks. They’re best suited to people who intend to pay for most of their purchases with an alternative payment method, such as cash.
Do you plan to use your credit card regularly? A card with an annual fee is probably a better option. While you will have to pay an annual fee to the card issuer, you’ll save a lot of money by paying less interest per year. In the end, you’ll have more money in your pocket.
Typically, credit card interest rates are around 20%, but there are also low-interest credit cards available at about 10% to 12%. Interest rates generally vary depending on the type of transaction. Usually, cash advances have a higher interest rate than regular transactions.
It’s a good idea to choose a low-interest credit card if you have trouble paying off your balance in full each month. This way, you’ll pay less interest and reduce your debt-to-credit ratio.
A credit card with a high interest rate is a good option for disciplined people who keep their monthly balance at zero. Why? Because they generally offer better rewards programs.
Rewards programs and perks
Many credit cards offer a rewards program or perks. Here are the most common ones:
- Cumulative points program
- Cash backcash back
- Travel insurance
- Rental vehicle damage insurance
- Extended warranty
- Access to exclusive locations, such as airport VIP lounges
If you have a credit card with a points program, you’ll earn a certain number of points for every dollar you spend. When you’ve accumulated enough points, you can redeem them for various rewards, such as travel.
Cash back credit cards let you earn cash back every time you use your card. When you reach a certain threshold ($25, $50, $100, etc.), the money is automatically deposited. Sometimes cash back is deposited monthly or annually into your bank account.
The percentage of cash back varies by card and by purchase. For example, a card may give you 4% cash back on groceries, 3% on dining, and 1% on other purchases.
To get the most out of cash back cards, choose one that matches your shopping habits. If you’re a movie buff or concert lover, for instance, opt for a card that offers significant cash back on entertainment.
Regardless of the card you choose, the value of your rewards must be greater than the annual fee. For example, a card with a $100 annual fee wouldn’t make financial sense if you received only $25 in cash back per year. The same applies to other perks. Travel insurance is of little use if you never travel.
Credit balance insurance
Many financial institutions offer credit balance insurance. With this optional coverage, part or all of your balance is paid down in certain circumstances:
- Job loss
- Critical illness
The cost of credit balance insurance is calculated based on your monthly balance. For example, it might cost you $0.75 for every $100. If your balance is zero, you typically don’t have to pay anything.
To access the coverage, however, you must meet certain criteria. For example, voluntary job loss is not covered by most credit balance insurance plans.
In fact, if you already have life and disability insurance, credit balance insurance is usually not necessary. In many cases, it’s more beneficial to increase your current coverage, rather than purchase new insurance.
A credit card that’s right for you
As you can see, you shouldn’t choose your credit card at random. There are a number of features you need to consider to make sure your new card is right for you.
Whatever you choose, be sure to pay the monthly balance, or, failing that, the minimum balance, every month. This way, your credit card will work for your personal finances—not against them!
- Choose a card with a low credit limit if you’ve never had a credit card before so that you can learn to use it at your own pace.
- Cards with no annual fee usually have a higher interest rate, but they’re a good option for people who make few purchases using credit.
- Rewards programs typically let you get cash back or redeem points for goods or services.