What should I look for when choosing a credit card?
First thing’s first, let’s look at the components that make up a credit card. When you are looking at the different types of credit cards, you should look for the following terms, as they mean a lot to your choice:
Interest Rates
This is probably the biggest thing to look out for when choosing a credit card. The interest rate is the amount of money you need to pay on top of your original purchase. The interest rate is often called annual percentage rate (APR).
For example, if you buy a $600 tv with your credit card and have an APR of 17%, by the time you’ve paid off your purchase over 12 months, you’ll have paid an extra $56 in interest.
Many cards offer introductory rates as low as 0% APR to entice people into signing up. However, those interest-free periods typically don’t last long at all — most range from 3-12 months, then jump to as high as 22%.
In short — get the lowest interest rate you can find that lasts more than just an introductory period.
Annual Fees
Annual fees are the cost of actually owning the card, and are usually in the form of a yearly or monthly fee. These can range from as low as $0 to as much as $500 a year. Keep in mind that if you have an annual fee, you will have to go out of your way to cancel it before the year is up — otherwise you’ll be paying for it each year for as long as you keep that card.
Transaction Fees
Transaction fees are the fees you pay every time you make a purchase on your credit card. This can be in the form of a percentage, such as 3%, or it can be a flat fee such as $5 for each transaction. For many people, these fees can add up quickly and they might not even realize it.
Make sure you know how much each transaction costs before you choose your credit card.
Credit Card Limits
Credit card limits are the maximum amount of money you will be able to spend with your credit card. It may sound limiting, but it’s really not, as long as you only use the card for purchases that are under this limit.
For example, your credit limit might be $500. If you have a purchase that is over that limit — let’s say a new television costs $550 — then you would have to pay the extra $50 with another method, such as cash. In general, however, we don’t recommend maxing out your credit card, as this shows lenders that you are living at the limits of your means.
What are the different kinds of credit cards?
Once you understand the terms above, it’s time to look at the specific types of credit cards on offer.
Student Credit Cards
Student credit cards are a good option for those who are about to go into college and want to build their credit. They charge lower interest rates and come with lower limits, which can help you manage your spending better.
Debit Cards
A debit card is a secured bank account with a little bit of plastic attached to it — it allows you to make purchases as well as cash withdrawals. A debit card will work like a credit card, but the difference is that the money comes from your own account instead of borrowing from the bank. If you prefer not to have debt at all, this might be a good option for you.
Prepaid Credit Cards
A prepaid credit card is exactly what it sounds like — you load money onto the card before using it. The good thing about this type of credit card is that you can’t spend more than what you have in your account.
Low APR Credit Cards
If you’re looking for a low-interest rate and have a relatively low annual income then a low APR credit card might be a good option for you.
Rewards Credit Cards
With this sort of credit card, you get rewarded for using your card — whether it’s 1% cashback on all purchases or rotating categories with 5% cashback. These types of credit cards usually come with higher annual fees and no introductory APR rates. Because the interest rates are typically high, they are not recommended for people with low income or bad credit.
Low-Limit Unsecured Credit Cards
If you don’t have a high annual income but still want to build your credit, then consider getting a low-limit unsecured credit card. Compared to other types of cards on the market, these have lower limits and interest rates — which should make it easier for people with less income to get their first card and begin building a credit history.
0% Introductory APR Credit Cards
This type of credit card will allow you to make purchases upfront without paying any interest — provided that the balance is paid back within an established time frame. Make sure you pay your balance off before the higher APR kicks in, or you will be charged higher interest for all of your purchases. Note: 0% introductory APR credit cards usually come with higher annual fees and no rewards.
Store Credit Cards
These cards are only offered by specific stores and usually offer their best deals to shoppers who use their cards. The APR often includes an introductory period of 0%, allowing you to get the item you want without having to worry about interest rates. Just be careful if you can’t afford the balance in full at the end of the promotional period — otherwise, it will revert to the standard APR.
Balance Transfer Credit Cards
One of the easiest ways to reduce your interest rate is by transferring your credit card balance over to a lower APR card. A balance transfer only works if you have another account that offers a lower APR, but if you do then this can be an easy way to minimize how much money you are paying in credit card interest payments.
Secured Credit Cards
A secured credit card is a type of card that you have to put money on before you can use it. So if you want a $500 credit limit, you might need to deposit $500 of your own money onto the card first. Sometimes you might just have to make a deposit of say, $200 before you can use the card.
Banks issue these cards to ensure they will get their money back — if you don’t pay your credit card bill, the credit card company can take money from your deposit.
At the end of the day, it’s important to choose the card that will work for you, not the one that sounds the best. For example, a rewards credit card sounds, well, rewarding, but it will have a much higher APR than a low APR credit card. Choose with your head, not your heart!
What questions should you ask when choosing a credit card?
Are there annual fees?
Pretty much every credit card will have an annual fee, but some can be as high as $500 a year! If the rewards don’t outweigh the fees, you might want to look for a different card.
Will your credit card limit automatically increase?
Some credit cards will automatically increase your limit in the future if you use them responsibly. This is great for when you want to make large purchases in the future, and don’t want to worry about not getting approved by your bank.
What benefits does it offer?
Credit card companies like to nickel and dime us with fees, so we need to make sure our cards have the benefits we need. This can be things like no foreign transaction fees, rental car insurance, roadside assistance, etc.
Can you pay your balance off in full every month?
Remember that interest rates are very important when choosing a credit card — so it’s really up to you to figure out if you’re capable of paying your balance off every month. Of course, if you do choose to not pay your balance in full each month, make sure you know about the APR that will apply to any new purchases!
Can late fees be waived?
As with annual fees, late payment fees can be a big deal. If you’re going to carry a balance on your card from month to month, these fees can add up quickly — so it’s important that you have the option of waiving them if something comes up.
If there is a 0% introductory APR, and how long does it last?
Credit cards with 0% introductory APRs usually come with an expiration date on the 0% APR period, which can be a maximum of 18 months. In this case, it basically means you have up to a year and a half to pay off the card before any interest is applied (which is great if you want to make large purchases).
If choosing a 0% introductory APR credit card, make sure you know how long this introductory period is, and what the APR will be after this period. Ensure you have completely paid off your credit card at the end of this introductory period so that you don’t get hammered with big interest rates when you least expect it!
Can you choose the due date on your credit card?
If you are someone who is most likely to have big purchases come up at the end of the month, being able to set your credit card due date to be near the beginning of each month can help prevent overspending.
Can you lower the interest rate over time?
Some credit cards allow you to lower your interest rate over time by paying off part or all of your credit card at a time. If you’re a relatively responsible credit card user, this could be a good choice for you.
Is there an introductory bonus?
Some cards have great sign-up bonuses! Most often, these come in the form of cashback or points that can be redeemed for travel. If you will use your credit card enough (responsibly!) to take advantage of the bonus, it’s almost always worth signing up for it.
How much do they charge for cash advances?
Cash advances are a big deal. Usually, credit cards will charge you a fee of 3% to 5% of what you withdraw — so be sure to keep this in mind when looking at the costs of your new card.
You now have the knowledge on how to pick the right credit card for you, so let’s take a look at how to get it, and use it to your advantage.