"A credit card allows you transcend time. For it allows you to put off until tomorrow what you bought today, while you are still paying what you bought yesterday." -- Robert Morrissette
Before choosing a credit card, ask yourself "Which credit card is right for me?" After all, you want to pick the type that is best suited to your needs and financial condition before you apply to a bank for a card. Here are some recommendations that will help you.
Be in the best financial health
First off, before you start applying for any card, give some thought to your financial health. That's because the best credit cards, the ones that offer the best term and most generous benefits, tend to require a high credit score. What's a high credit score? Well, basic (non-industry-specific) FICO scores, which are used by about 90% of top lenders, range from 300 to 850. Here's how the folks at FICO rate the scores:
To keep your credit score high, pay off your bills in full and on time, and don't max out your credit limits on your cards. To get a good credit score, you need a solid credit history and credit report. Your credit report offers lots of details on your debts and repayment history, as well as a look at the credit you have, such as through credit cards. You're entitled to a free copy of our credit report annually from each of the three main credit agencies -- visit AnnualCreditReport.com to order yours -- then check it for errors and fix any that you find. Your credit report won't include your credit score, but many credit cards these days give you access to your credit score or include it on each statement.
If necessary, spend some time working to increase your credit score.
Kinds of credit cards
Credit cards are more different than you might assume, and they tend to fall in a handful of key categories, each of which best serves certain kinds of consumers. The kind of card that will serve you best will largely depend on your financial health and your spending habits. Here's a look at some of the key kinds of cards.
If you're carrying a lot of credit card debt already, you'll need to pay off credit card debt and any other high-interest-rate debt as soon as you can. Balance-transfer credit cards and low-interest rate credit cards can be good for that. Great balance-transfer credit cards will charge you no interest for a bunch of months while you work to pay off your debt, while great low-interest rate credit cards can help you spend less on interest payments. Study the terms closely to see what will work best for you. For example, the number of billing cycles during which you might enjoy a 0% intro APR will vary widely, and you might prefer a 21-cycle card to a 15-cycle one. Read the fine print and find out what your credit limit will be with the card. You won't be able to transfer more than that limit (less the balance transfer fee, if there is one), and if you exceed the limit, you might face a fee. If you want to transfer $8,000 of debt, for example, and the card limits you to $6,000, that's good to know and might influence your decision.
If you're not deep in debt, consider getting a great cash-back credit card or two that will give you cash back or rewards that can be redeemed, delivering value. Some cash-back credit cards offer a flat percentage back on all purchases. Others have tiers of percentages applying to different expense categories. Still others offer big rewards on a purchases in specified spending categories that rotate every few months. Some cards offer a combination of these features. To make the most of one or more cash-back credit cards, think about your spending habits. For example, if you charge a lot at many different places, you might opt for a general-use cash-back card. You'll find some general cards paying as much as 2% back on everything.
A particularly powerful niche in the reward-card world is the travel card. The best travel credit cards will reward you for your travel-related spending (often including restaurants) and/or will offer discounts on such spending.
If you do a lot of shopping, think about where you spend the most money, because there are many great retailer credit cards that give you discounts when you shop with them. Lots of credit cards offer a range of extra perks, too, such as insurance on some purchases, free shipping from a retailer, or perhaps access to VIP lounges in airports.
Pick credit cards with the best features
Once you're ready to start studying cards and choosing the right one for you, you'll want to be sure that each candidate has the features you need. Here are some valuable features for any credit card to have:
- A generous sign-up bonus: Some credit cards, especially travel-related ones, offer generous bonuses when you sign up for a card. You might need to spend a certain amount in the first few months, but then you might get points or some other reward worth several hundred dollars. Such offers are worth considering -- but be sure to consider all the other terms, too.
- No annual fee. Most credit cards don't charge an annual fee. Note, though, that if a card charges, say, $99 per year, and will deliver, say, $300 or more in value, then the fee can be worth it.
- No penalty APR. A penalty APR is what happens when card companies raise your interest rate, often to 25% or more, if you're late paying a bill. Look in a card's fine print to see whether there's a penalty APR, and perhaps avoid the card if it's there. Plenty of cards don't have this feature.
- No balance-transfer fee. If you're planning to transfer a balance, know that some cards will charge you about 3% to 5% of the amount you transfer from another card. That can still be worth it sometimes, but favor cards that charge no such fee, at least in the initial period when you make your transfer.
- Low interest rates. If there's a chance you will occasionally be carrying a balance, you should favor cards with a relatively low interest-rate range.
- No foreign transaction fees. Without this feature, if you spend money abroad or with a foreign-based retailer, you'll see currency-exchange-related fees on your statement.
- Other fees: Find out what fees a card will charge you -- such as for paying your bill by phone, getting a cash advance, being late with a payment, exceeding your credit limit, and so on. Think about what services and/or fees might apply to you and what the card might cost you.
- Access to your FICO credit score. It can be helpful to be able to check your credit score now and then, especially if you're working on paying off debt and increasing your score. Many cards these days let you see your score.
- Cash back -- or points or rewards -- that can be earned as you spend with your card. You can find cards that pay you 2% cash back overall on your purchases, and ones that offer up to 5% or 6% back on certain categories, such as supermarket spending. Some cards have pre-set cash-back rates for certain categories, while others rotate categories that earn extra-big rewards every three months -- sometimes even letting you choose the categories. Look into when, if ever, your points or rewards will expire.
Credit cards can help you save money, as long as you use them responsibly, only charging what you can afford and paying your bills in full and on time. If you're likely to overspend and run up a big debt load, you might consider just carrying cash.
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