How to Choose the Best Credit Card
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More than three quarters of U.S. consumers have at least one credit card, according to the Federal Reserve. And more Americans are forgoing cash in their daily transactions; almost one in three adults does not use physical currency in a typical week. That’s from a 2018 survey by the Pew Research Center, and the trend has accelerated during the coronavirus pandemic, since people are wary of handling unsanitary cash.
So you might be in the market for a credit card — and you might be asking yourself, “What credit card should I get?”
First of all, there’s no such thing as the best credit card; there’s only the best credit card for you.
Choosing a credit card is a personal decision that should be tailored to your individual spending habits, and to your goals — whether that’s racking up points and miles for travel or earning cash back on your everyday purchases.
And most importantly, you should put your spending on a credit card only to buy things you could afford with cash — and that you can pay off without carrying a balance, which accrues high interest.
“The golden rule of credit cards is to spend responsibly,” says Zach Griff, a card expert who’s a writer and travel analyst at travel site The Points Guy. “Try not to carry a balance or spend beyond your means.” (The Points Guy shares an owner with NextAdvisor.)
That said, there are some card features you should be aware of before you apply for any card.
Points or Cash Back Earning Structure
First, and arguably the most important, is understanding how the card will reward you for your spending.
You may get points, which you can redeem for travel or other credits; you may get airline miles; or you may get cash back so you save immediately on your purchases.
Some credit cards will earn you bonus points on various spending categories, including dining, groceries, travel, airfare, hotels and more. If you’re considering getting a card that earns you bonus points for travel, it’s important to choose one with rewards geared towards your spending habits, so you can maximize earning points. For example, if you frequently spend money on going out to eat or ordering takeout, consider getting a card that earns bonus points on dining.
Before shopping around for a card, know what you would spend the most on. That will help you choose a card that gets you the most rewards.
Other cards will earn you cash back on everyday purchases, such as gas or groceries, and even on online shopping or Amazon purchases.
Many credit cards also come with perks and benefits to help enhance your travels and your everyday life.
Those perks include access to airport lounges, travel credits, free nights at hotels, Uber credits, dining credits, refunds for applying for TSA PreCheck screening, and more. You can even get credit to shop at Saks Fifth Avenue. Most of those perk-heavy cards come with high annual membership fees, but the perks can offset the cost of the fee — if you use them. So it’s important to apply for a card offering benefits that you’ll know you’ll take advantage of. For example, lounge access may not be attractive while much of the world has paused or reduced travel during the coronavirus pandemic, but dining credits could be far more interesting.
“If you don’t take advantage of all the perks of your card, you’re leaving money on the table,” Griff says. “Be sure to do your research. Don’t just sign up for a card because it has $500 in travel benefits — make sure that you actually plan on using the benefits.”
A key point to consider when choosing a travel rewards card is: Who are the travel partners — such as airlines and hotels — of your potential credit card? If you want to fly Delta Air Lines on an upcoming trip, or you live in a city where most flights are on Delta, it’s a good idea to look into an American Express card, since you can transfer your Amex Membership Rewards points to Delta in the form of air miles. Similarly, all other major airlines offer co-branded credit cards.
Many travel rewards credit cards offer what’s called a sign-up bonus or welcome offer. If you spend a certain amount of money in a given time from the moment you open the account, you’ll earn bonus points.
These offers vary from card to card, and can earn a large number of points, so take a close look at what you could do with the bonus. But you must be sure that you can spend enough in the given time frame to meet the target.
This is where it is especially important to make sure you can pay your credit card bills on time, ideally in full, every month. Don’t spend more on a credit card than you would otherwise if you were using a debit card or cash, just in order to hit the sign-up bonus. The interest you pay on the balance you carry might well cancel the value of the bonus.
Applying for a Card Affects Your Credit Score
When you apply for a credit card, the issuer makes a so-called hard inquiry on your credit report to determine your creditworthiness. Unlike a “soft inquiry,” this can have a negative effect on your credit score, lowering it by about five points. That, however, is temporary.
Your credit score comes into play when you buy or rent a home, finance a car, apply for any type of credit or even sign up for a mobile phone contract — so keep that negative effect in mind when applying for a card. Apply for a card when you think you’ll be approved and you know you’ll use it.
Getting the right credit card can also help you build credit history, which is a major factor in your credit score. It can also get you started on a credit card strategy, especially if you want to start off small with a no-annual-fee or cashback credit card and progress to higher-tier cards.
“You want to start slowly to build your credit history,” Griff says. “It’s very hard to go from zero to 60 with your first few card applications.”
In my own personal experience, I started off with the Amex EveryDay credit card to build up credit history in my own name before applying for travel rewards cards requiring a high credit score (and charging high fees), such as the Chase Sapphire Reserve or the Platinum Card from American Express.
Showing issuers that you can responsibly handle a credit card by paying your bills on time and not going over your credit limit will be essential in building your credit history.
Choosing a credit card is a highly personal decision; your lifestyle and goals should play a major part in the decision. You should weigh accurately all factors before you apply, especially if it’s your first time getting a credit card.