October 11, 2017

What Credit Card Should You Get?

Read more about Best Credit Cards

The perfect credit card should help you reach your goals and match your lifestyle and financial situation. Here's how to pick the right card for you.

Picking the right card isn't so easy. There is no credit card that's "one size fits all." So how do you find the one that matches your needs? The best credit card can help you build positive credit history, save money, and get you closer to your goals.

Read on for the 4 important questions to ask yourself. These should help narrow in on the right kind of card for you.

1. What Is Your Existing Credit?

First off, your credit will determine what kind of credit cards you qualify for. If your credit isn't high enough, your choices of credit cards will be limited.

  • If you have no credit: If you're new to the world of credit cards, your choices are pretty much limited to secured credit cards. These cards don't require a credit history for approval. Instead, they require a security deposit, which will usually become your credit limit. The secured cards we recommend all report to the 3 credit bureaus to help you build credit responsibly.

  • If you have bad credit: Again, secured credit cards are your best option. Or you may possibly qualify for a store card because they tend to have much lower credit requirements.

  • If you have average credit: You have more options for an unsecured credit card. Some may even offer rewards. See our recommendations for credit cards for fair credit.

  • If you have excellent credit: Then you have a wealth of options, from cash back cards to travel reward cards. Some of the most popular reward cards are only for those with excellent credit.

There are multiple "credit scores" from different credit bureaus, but here's the general range:

  • Bad credit: 550 and lower
  • Average credit: 551 - 669
  • Good credit: 670 - 719
  • Excellent credit: 720 and above

2. Can You Pay Off Your Entire Balance?

This is a very important factor to consider. If you usually need to carry a balance, your goal should be to reduce your interest by as much as possible. It's pointless to apply for a rewards card, because the high interest charges could wipe out any rewards you earn.

  • If you tend to carry a balance: A low interest card will help minimize the amount of interest you pay. You can also consider a card from a credit union, as they usually offer very low interest rates.

  • If you have existing credit card debt: We recommend putting paying off debt as a priority. A balance transfer is the smartest move to pay off that debt. Usually balance transfer deals have a 0% intro APR period during which you can focus on paying off the debt without accumulating more interest.

  • If you're planning some large purchases: If you have large purchases on the horizon (such as furnishing a new home) that you know you won't be able to pay off quickly, look for a card with 0% intro APR for new purchases.

  • If you're able to pay off your entire balance: Then you're in a great position to earn rewards. Read on for the different options.

3. What Kind of Rewards Do You Want?

A good credit card should help you reach you goals. Are you looking for some extra cash? Or are you hoping to score a free flight for your trip to Europe next year?

  • Get extra cash: Cash back cards will give you a percentage back for every dollar you spend. They're easy to use and you can use that extra cash for anything you want.

    Look for a card that earns bonus cash back in the categories you spend most on. For example, if you spend a lot on groceries and gas, then choose a card that focuses on those areas. If your spending is very varied, then you may like a card that offers a flat reward rate on all purchases.

  • To travel more: If you like to travel, a travel credit card can help you earn flights and hotel stays. This can potentially be worth more than just straight up cash back. There are a few types of travel cards. The right one for you depends on your travel style and what you value:

    • General travel reward cards: Your points are applied as a statement credit on travel-related expenses. These cards are easy to use and you can use them for any travel purchases. You may prefer this if you travel, but not necessarily fly or stay with major hotel chains.

    • Transferable travel reward cards: The points earned with these cards can be transferred to airline and hotel partners. If redeemed properly, the value could be a lot more.

    • Co-branded cards: Just about every major U.S. airline or hotel chain offers co-branded credit cards. This is good if you travel frequently with an airline or hotel. You'll receive unique perks, such as free checked bags.

    See our top recommendations for the 3 types of travel reward cards.

4. Do You Spend Enough to Justify an Annual Fee?

A lot of reward cards have an annual fee. Cards with annual fees offer better rewards, but you have to make sure you spend enough to justify the fee.

Your rewards must be greater than the rewards earned with no-annual-fee cards. To calculate this, first think about how much you usually spend on your credit card a month. Then do an estimate of the rewards you'd get and compare it with no-annual-fee cards.

For example, let's say you're interested in a card that gives 6% cash back on groceries, 3% cash back on gas, and 1% on everything else. But it has a $95 annual fee. Each month, you usually spend an average of $1,000, with $300 of it going towards groceries and $150 towards gas.

  • $300 on groceries X 6% cash back = $18
  • $150 on gas X 3% cash back = $4.50
  • $550 on everything else X 1% cash back =$5.50
  • Total cash back in 1 month = $28
  • Total cash back in 1 year = $336
  • $336 - $95 annual fee = $241 net cash back

So in total, we netted $241 cash back while spending $12,000 in a year. This is an overall reward rate of 2% ($241/$12,000). Usually, if your calculated overall reward rate is less than 1.5%, then it's better to just go with a no-annual-fee card.

Other Things to Think About

Here are a few other things to consider when making your choice:

  • Sign-up bonus: A lot of reward cards offer a generous sign-up bonus if you spend a certain amount within a certain time frame. Sometimes this bonus can be worth as much as a roundtrip flight. This may be tempting, but make sure the other terms work for you too.

  • Foreign transaction fee: If you travel abroad, you'd want a credit card with no foreign transaction fee for purchases made outside of the U.S. (usually 3%). Usually travel reward cards don't have this fee.

  • Other fees and penalties: Make sure you know what the other fees are, such as balance transfer fee, over-the-limit fee, late payment fee, and penalty APR. If you know you sometimes forget to pay, some cards have no late fees and no penalty APR.

Bottom Line

The right credit card for you depends on your credit, financial situation, your goals, and spending habits. In general, if your credit isn't stellar and you tend to carry a balance, you should look for a credit card with low interest rates and intro APR. If your credit is excellent and you pay your bill in full, you'll benefit with a reward card that gets you closer to your goals.

Write to Anna G at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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