Cashay logo

Empowering your money

How to choose the best credit card: Factors to consider

At a glance:

In the old days, you had few choices when it came to a credit card. Today, you have choices that vary by all kinds of conceivable factors. To most people, these differences are considered too esoteric to think about. These people simply want a card to borrow from. But if you take the time to read what's involved, you can save a lot of money. Think of every dollar you save as a dollar you earned.

Learning the art of choosing a credit card can also put money into your hands — for example, if you take full advantage of cash-back rewards and pay your bill on time every month, you can come out ahead.

Let's take a short trip through the world of evaluating credit cards.

How to find credit card deals

The savvy credit card user shops around for good deals, knowing that he or she can save a bundle in fees and interest charges. Thousands of financial institutions and other organizations offer credit cards.

The first step to take is to make sure that your credit is in good standing. If it is, you will have a lot of opportunities, and they will be on good terms for you. If your credit is not good, there are still opportunities, but they are fewer, and the terms are not as good.

Read the fine print online

By law, credit card companies must display credit card contracts online. This means that you can invest some time in reading them, comparing their interest rates, their fees, how they charge interest rates, their rewards programs, and other features.

Credit card websites

Many online sites will compare credit cards for you. They will compare interest rates, rewards, introductory interest rates, fees, and credit requirements. Some of them categorize cards into uses, such as student cards, secured cards, low-interest credit cards, cards for bad credit, and more.

Examples of these credit card marketplaces include creditcards.com, bankrate.com, and the Federal Reserve's own site.

It pays to be connected

Are you a university alum or a member of a professional organization? You can qualify for a credit card through them, and they may have low interest rates and other valuable perks.

Try a credit union

Many times, credit unions have the most favorable interest rates on credit cards. If your credit is not very good but you have a checking account or a share account, you can apply for a secured credit card that uses that account as collateral. This can help you build up your credit over time.

How to evaluate credit card features

Not all credit cards are created equal. Based on how you use them, their differences can cost you a lot of money in various expenses. Here are some features to look at:

Credit limit

How much of a credit limit do you need? If your credit is good, you will probably be given a fairly high limit, and if you pay it off regularly and don't max it out, you can qualify for raises in your credit limit as time goes on. Different cards will offer different limits, so if you want a high one, investigate several.

If your credit is not very good, you will likely be given a low limit at first, and you will have to prove yourself through disciplined spending and payback before you can qualify for a raise. But again, investigate several cards.

Rewards

Many card issuers offer rewards to encourage you to use their cards. These rewards are in the form of points that can be redeemed. How much is the reward (1% cash back is common) on the cards you are looking at? Is there flexibility in how you can take it? Do the rewards expire? Are there limits to how many points you can earn? Are there restrictions on redeeming your points?

Some people like to use a separate rewards card for purchases that they know they can pay off each month (they save up the money ahead of time) and on which they won't have to pay interest or fees. This way, they accumulate their points, redeem them, and come out ahead without having spent anything.

These people deliberately choose cards that have the best rewards programs (they also usually have excellent credit). For those with great credit, a card issuer might raise the cash-back percentage periodically.

Some card issuers charge extra for rewards programs, and some don't.

This Sunday, Aug. 11, 2019, photo shows a Capital One Venture card in New Orleans. (AP Photo/Jenny Kane)
Make sure you use your credit card wisely. (Photo: AP Photo/Jenny Kane)

Balance transfers

Balance transfers usually come with an enticing proposition: transfer your balance from one card to another and pay little or no interest for a certain period of time. These offers are common to first-time cardholders, but if your credit is good, you can be offered them time and time again.

There is usually a fee for this service, such as 3% of the transferred balance. Weigh that against how much you would save in interest during the promotional period, and you can judge whether it's a good idea for you. Just remember that when the promotion ends, you are back to the regular interest rate on that transferred balance. Look at how that regular interest rate compares among different cards.

Some card users like to use a separate card for balance transfers.

Things you might miss if you don't read carefully

Look carefully in the fine print for things such as these:

  • The right to raise your APR at "any time for any reason."

  • Universal default, in which the card can raise your APR if you make a late payment on some unrelated card or loan. Phrases like "defaults to other creditors" will tip you to this.

  • Other fees beyond the ones most people are familiar with.

How to evaluate credit card interest and fees

Credit card interest and fees are not created equal. Some will cost you a lot more than others. Here is what to look for:

The APR

The interest rate you will pay on your card is called the annual percentage rate, or APR. APRs differ among cards, sometimes greatly. If you don't usually incur fees or care much about the bells and whistles of different cards, then the APR may be the major selling point for you. Some APRs are fixed while others are variable, meaning that they change periodically.

There are three APRs you should be aware of. There are promotional APRs (also called introductory or teaser APRs) for balance transfers and for some new cards. These APRs last a certain amount of time before switching to the regular APR, which is the normal rate charged on your card. There is also a default APR, which will kick in if you violate the terms of your credit card agreement by, say, making a late payment.

Compare APRs for several cards. If your credit is good, you should qualify for lower rates. If you belong to a credit union, you may get an even lower rate on its card. Don't be taken in by cards with low promotional APRs: the regular APRs that they will switch to might be higher than you want. That's why it's important to compare the three APR types among several cards.

APRs that are advertised may not apply to everyone. Read the fine print to see if you qualify.

Cash advance and balance transfer rates

The APRs on cash advances and balance transfers differ from the regular APR; they are often higher. Compare these rates among cards as well, especially if you plan to use these features a lot.

How the finance charge is calculated

Interest is not calculated the same way for all credit cards. A card will use any of the following methods:

  • Average daily balance. Each day's balance in the billing cycle, averaged out.

  • Beginning balance. The balance at the beginning of the billing cycle.

  • Adjusted balance. The beginning balance minus any payments made during the month.

  • Ending balance. The balance at the end of the billing cycle.

Based on your spending and payment behavior, which of these would result in the lowest interest for you? That's what you must consider.

Southern states have more credit card debt. (David Foster/Cashay)
Southern states have more credit card debt. (David Foster/Cashay)

Fees and penalties

Know every fee and how much it is and what causes it to apply. Fees aren't always the same for every card; some cards are more severe than others. And some cards with otherwise attractive features will compensate for them by charging high fees and penalties. Fees are charged for going over your credit limit, paying late, transferring balances, making cash advances, paying your bill by phone, putting a stop payment on your card, and other occurrences. Additional fees may arise in the future, such as swipe fees that compensate merchants for fees they must pay to credit card companies.

When comparing cards, you can find some good deals. For example, if you plan to do balance transfers, there are cards that have no transaction fees and/or zero percent interest for a certain number of months, such as 12. Again, the better your credit is, the more chance you will qualify for good deals like these.

Some cards charge annual fees. In return for these fees, they may offer better features than non-fee cards. For you, would the benefits of using an annual-fee card outweigh the annual fee?

Ways to use a credit card

Different people have different uses for credit cards. That translates into different needs and priorities when choosing cards. A card company, of course, wants you to use your card for all possible uses; it can make the most money out of you that way. But your priorities will probably differ from theirs.

One-time use and payoff

Some people like to pay off their balance every month so that they never carry a balance. Most cards will not charge interest if you pay off the balance in this manner. Therefore, a long grace period is a priority to them. No annual fee is also a priority. A generous rewards program is important because these users rack up money or travel rewards this way; some users come out ahead by planning their spending appropriately. They save up cash for a purchase, pay for it with a card that offers rewards, and then pay off the whole balance right away, avoiding interest and fees while earning the rewards on it.

Finally, if you intend to pay off your balance each month, the interest rate probably is not a priority for you.

Carrying a balance

If you will be keeping a balance on your credit card either regularly or just periodically, the interest rates will be very important to you. You will want the lowest possible interest rates, not just for regular purchases but also for cash advances. You might also want the lowest possible introductory rate, and you should note how long it lasts before it reverts to the regular rate.

An annual fee is something to think about here. Don't dismiss it as all-bad. A card may charge an annual fee but a low interest rate to compensate you for the annual fee. If you carry a balance, you might find this to your advantage, depending on the size of the balance. Other cards might waive the annual fee but compensate by charging a higher interest rate, which could cost you extra over the course of the year.

If you are prone to making late payments or doing other things that trigger fees, you will want a card with the lowest possible fees. But remember that these triggers can also raise your interest rate as well as damage your credit rating.

Balance transfers

You might get a separate card just for transferring balances from other cards because it offers a special balance-transfer rate for a certain period of time. Do you plan to have the whole balance paid off while the special rate is in force? Then a card with the lowest rate is for you.

There is likely to be a balance-transfer fee, such as 3% of the transferred balance. Factor this in with the balance-transfer interest rate to get the full picture of how much you are paying.

When the special rate ends, you are back to the regular interest rate. Your card may send you invitations to do additional balance transfers in the future, though the rates may change for those. That means that if you plan to both carry a balance and do balance transfers with the same card, you will have two different interest rates to contend with. For convenience's sake, some people like to have one card dedicated to balance transfers and another just for regular purchases.

Summary of choosing a credit card

Credit cards can be addictive—once you've got one or two, the offers start rolling in and you get hooked on all that goodwill and trust that those big companies are willing to give you. And then there's all that money you have at your disposal. It's enough to make both you and the credit card companies salivate.

On one hand, it's good to have a few cards, perhaps one from a bank or credit union and perhaps a store card. You want to build up a good credit history so you can qualify for things like mortgages or business loans in the future. But having too much open credit can harm your credit score because you will be perceived as undisciplined or reckless.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Credit cards section

Read more personal finance information, news, and tips on Cashay

Follow Cashay on Instagram, Twitter, and Facebook