Credit cards are difficult to avoid! Between the endless amount of mail you’ll receive from banks and credit card companies, or being offered a credit card at the various department or retail stores you shop in, we’re constantly being bombarded with options. Credit cards also have a bad reputation in the personal finance world.
It’s true, it’s incredibly easy to get into debt with a credit card, and credit card debt is crippling. But, if you use a credit card correctly, it’s a great financial tool to have. Before you decide which credit card is right for you, it’s a wise idea to do a credit card comparison.
Choosing a Credit Card
Various credit cards have various benefits. Some big box retailers provide 3-5% off in store purchases if/when you use the store’s credit card. Whereas other credit cards give frequent flyer miles, or a percentage back for purchasing everyday things, such as gas or groceries.
Know Your Credit Score
Before you get a credit card you’ll want to know your credit score. Your credit score is a three digit number that represents one’s creditworthiness. Ones credit score will fall into 1 of 5 categories:
- A very poor credit score is between 300 and 579
- A fair credit score is between 580 and 669
- A good credit score is between 670 and 739
- A very good credit score is between 740 and 799
- An exceptional credit score is between 800 and 850
The higher the score is, the better. Various perks and benefits will be offered to you if you have a strong credit score.
What Happens If I Don’t Have a Credit Score?
It takes credit to build a credit score. If you’re just starting out, you may not have a credit score. Generally speaking, you’ll still be able to get some type of credit card. The credit card may have a low maximum spending limit, and it may come with a high interest rate.
Even with that in mind, you need to build your credit score. So much of your adult life is dependent on your this score — from renting an apartment, financing a car, or even getting a personal loan.
Identify Your Credit Card Needs
Various credit cards serve different needs. Understanding your why behind wanting a credit card may help you select the right card.
Cards That Help Improve Credit
As mentioned above, some folks just want to get a credit card so they can improve their credit score. A department store, like Target, is a great place to start. The card can be used for all in store purchases, and generally speaking, they are easier to obtain considering their limited use.
Student Credit Cards
Student credit cards are designed specifically for college students. Understandably, most college students do not have a long credit history as they are just starting out. The approval requirements are more lenient with student credit cards, and they tend to have lower spending limits. Instead of the credit card being maxed out at say $10,000, student credit cards may max out at $2,000.
Secured Credit Cards
A secured credit card is backed by an initial cash deposit. If someone deposits $500, the credit cards maximum limit will likely be $500. These credit cards are a great option for those with a poor credit score. The initial deposit reduces the lender’s risk, which makes them more flexible to approving the applicant. Once someone approves their credit score, they can ‘graduate’ to an unsecured credit card.
Cards That Help Save
There are also credit cards that can help the card holder save money. These can be a powerful tool to have in your financial toolbox if used properly.
Low Interest & 0% APR
A low interest and/or a 0% APR credit card are a great way to save some extra money. APR is an acronym for Annual Percentage Rate, or how much interest the credit card company will charge the card holder per year in interest. If you come across a 0% APR credit card, the credit card company is essentially lending you money at no additional cost to you for a given period of time.
Home Depot has consumer credit cards that offer 0% interest for a given period of time. Therefore, if you’re making a large appliance purchase for example, you can stretch out the payments across 6 or 12 months and not pay additional interest if the entire balance is paid off in full within the given time period.
Balance Transfer
A balance transfer is when one transfers credit card debt to another credit card company. This practice is common when credit card “A” has a higher interest rate than credit card “B”. If the card holder transferred all the debt to credit card “B”, they will pay less interest each month, which in return, will put more dollars in their pocket.
Cards That Earn Rewards
Credit cards that earn rewards can be terrific. Some credit cards provide ‘cash back’ offers, where the card holder may receive 1% cash back on all purchases, 2% cash back on gas purchases and 3% cashback on groceries. Simply put, for every $100 in groceries, the credit card company gives you $3.
Benefits & Downsides of Reward Cards
These rewards or cash based cards are a great way to pay for everyday expenses and receive a slight discount. Keep in mind, if you do not pay off the credit card in full every month, the interest rate the card charges likely costs more than any of the rewards you were provided.
What to Look For? The Credit Card Checklist
There are a few important pieces of information you’ll want to understand before selecting your credit card.
Annual Percentage Rate
The annual percentage rate, or APR, is how much money a credit card company charges the card holder for the outstanding balance. If the APR is 20%, and the outstanding balance is $1,000 on the credit card, the card holder will pay $200 just in interest! The lower the APR, the less interest the card holder will pay. The higher your credit score is, the lower APR you’ll likely be offered.
Minimum Repayment
The minimum repayment is how much the card holder will be responsible to pay each month at an absolute minimum. For example, no matter the size of the outstanding balance, the credit card may have a $50 minimum payment. If this amount is not paid, your credit score can be negatively impacted and the outstanding balance can receive late fees.
Annual Fee
The annual credit card fee is how much a credit card company charges the card holder per year just to have access to the credit card. The vast majority of credit cards do not have an annual fee, but the ones that do have and average fee around $100.
Charges & Credit Card Agreement
The credit card agreement is worth a read just to make sure everything makes sense. This will be where the terms and conditions of the card are outlined. Information such as interest rates and fees can be located within this section.
Introductory Interest Rate
Some credit cards offer an introductory interest rate. This may be a 0% APR for the first 6 months of owning the card. Although not present on all credit cards, it’s a nice perk to have when it is offered.
Rewards & Cash Back
As mentioned above, rewards and cashback are amazing perks of a credit card. From getting money back for everyday purchases, to earning free miles on various airlines, you can save money if you properly use these cards to your advantage.
Use a Comparison Website When Comparing Credit Cards
There are an endless amount of credit card options available. Understanding why you want a credit card, and what you’ll use it for, will allow you to make the best decision when selecting the right credit card.
Using online websites to compare credit cards is the best way to view a variety of credit card options from the comfort of your own home. You can easily see which cards/companies offer what benefits, and what some of the cons are for each card.
Get Help Choosing the Right Card for You
When used properly, a credit card is a great financial tool. You can receive cash back for everyday purchases, finance some purchases interest free for a specific period of time, and build your credit score. However, it’s easy to spend too much money with credit cards. Credit card debt is a big problem that impacts millions of Americans.
Before deciding which credit card is right for you, you should also consult with a financial advisor. Financial advisors can take a high level view of your financial situation and help you make the best granular decisions. They will help you manage your debt, develop a savings plan, and help you uncover how much money you can/should spend on discretionary purchases.