Credit cards have somewhat of a tumultuous reputation, and so knowing how to choose a credit card can be difficult.
On one hand, there’s a risk of paying a large amount in just fees and interest, not to mention that you might also get into a lot of debt if you don’t use your card responsibly. But on the other hand, you build credit, earn and save money, benefit from reward programs, and even gain some choice offers like frequent flier miles.
So despite the many warnings, you trust your instincts that you won’t rack up a huge debt. But, before you choose a credit card, what should you know? Let’s find out!
What to Know When Choosing a Credit Card
Here are some pointers on choosing a credit card.
What Your Spending Habits Are
If you have a pre-existing bank account, you can get a credit card. But the question is, how to choose a credit card to suit your spending and payment style?
Are you someone who—without fail—pays their credit card bill each month? Or will you be carrying a balance per month? Will you be using it to support your basic lifestyle or is just for emergencies? Here are your options:
- Pay Bill in Full: For responsible payers, the interest rate will not interest you. So, finding a card that has no annual fee and a grace period that’s longer than normal will benefit you in the long run.
- Carry a Balance: You’ll want a card that has a low introductory rate and a low interest rate, the lowest you can find.
- Used Daily: Find a card with a good, useful rewards program, as well as a substantial credit limit.
- For Emergencies: Choose a basic card with low fees and a very low interest rate.
The Interest Rate Offered by the Issuer
If you’re new to the world of banking, interest rate will appear on your credit card offer as annual percentage rate or APR. A variable or fixed rate tied to the prime rate, this rate fluctuates if you have a card with a variable rate, whereas with a fixed rate, it will be the same each month. However, for the latter options, some factors such as paying your bill late or going over the limit will change the fixed interest rate. Or if the credit card company chooses to change it.
A set amount that the bank will allow you to borrow from them, this credit limit can either be in the few hundreds, or thousands of dollars, depending on your credit history.
Maxing out this limit is an issue, since it hurts your score. Your bank can also choose to cut the limit if there’s suspicious or excessive activity, something which you’ll get a penalty for. So be very careful when choosing a credit card if you have a patchy credit history.
All Fees and Penalties on the Card
Starting with fees, there are small fees for almost every action. Cash advances, balance transfers, payments by phone, a request to increase in your credit score. Credit card issuers look for all ways to milk money off their client.
All these fees might seem small. But consider how many customers each company has. You can be sure that the total sum from all charges amounts to millions.
As for penalties, actions such as paying your bills late, or going over the credit limit do carry hefty penalties, so you might want to curb your spending habits early on.
Incentives Offered by the Issuer
From gas and fuel and groceries to rewards for spending at various restaurants, credit card issuers offer a number of reward programs to tempt their customers into using their cards.
If those rewards and incentives are something that match your spending habits, it might be a good choice to opt for the program, since you’ll benefit from it. But, some programs and specific incentives come with expiration dates and limits. Others offer flexibility and easily redeemable and earned rewards. Do your research thoroughly and choose the best one.
Computing Method for Balance
If you know you’re going to carry a balance after you get a credit card, you might want to find out how this charge will be calculated. Typically, the average daily balance is taken, which is the daily balance added together, then divided by the exact number of days in your billing cycle.
But with some companies, be warned. Issuers compute this balance by using 2 billing cycles instead of the regular one. So, you do lose a lot of money by just paying the fees. Choose credit cards that don’t use such a system and you should be fine.
Other Financial Necessities
Do your other financial benefits necessitate getting a card? Do you have student loans that make extra spending a daily pain? If yes, then you may need a credit card. While some student loans types can be forgiven (check out this student loan forgiveness directory by FutureFuel for guidance), others need to be paid in full, thereby resulting in you needing a regular credit card for daily spending.
Ready to Choose?
The above information should inform you well enough on how to choose a credit card. So, follow the advice wisely, and be careful with your finances. A credit card will always be beneficial for your financial circumstances if you handle it responsibly.