How to Choose a Credit Card That Is Fit for Your Finances
Choosing the right credit card and using it responsibly can be helpful when it comes to your finances. Here’s how.
Contributing Writer at Tally
September 21, 2022
Credit cards often get a bad rap, but they have the power to be financially helpful when you use them responsibly. The first step is knowing how to choose the right credit card for your financial situation and goals.
Below, we explain how to choose a credit card that’ll provide an opportunity to maximize financial gain and avoid certain pitfalls. We also outline how to use your card responsibly to reap the rewards.
How to choose a credit card: What to look for
When choosing a new credit card, you should look for specific attributes you’d want and those you’d prefer to avoid. Familiarize yourself with the following perks and pitfalls that can accompany a credit card.
Avoid the annual fee
Try to avoid the annual fee when searching for a credit card. While annual fee credit cards generally have some of the best perks, these fees are sometimes huge. Some annual fees are manageable, but other yearly fees can be upwards of $500 or more. No matter what the annual fee is, it’s best to avoid this unless the credit card has a helpful perk with a potential value that is greater than the yearly fee.
For example, some travel rewards credit cards include a statement credit for TSA PreCheck and/or Global Entry fees, which are $85 and $100 for five years, respectively. If the credit card annual fee would essentially offset those fees, it might be a worthy expense.
You can find the annual fee in the credit card’s disclosures during the application process. Credit card companies are also legally obligated to offer this information upfront.
The annual percentage rate (APR) is the percentage of your balance that you are charged per year for using the credit card. While the percentage is annualized, you’ll pay interest charges monthly. For example, if you have a $1,000 balance on a 20% APR credit card, the annualized interest is $200, but your monthly statement will have an interest charge of $16.67 ($200 / 12 = $16.6666666).
Credit card interest rates are typically variable, meaning they rise and fall with the prime rate, the interest rate commercial banks charge their most creditworthy customers. The prime rate is based upon the Federal Reserve rate and will rise and fall alongside it. Credit card companies then add a margin percentage — basically a markup on the prime rate — based on your credit score.
So, if you have a good credit score, you may get prime plus 10%, but a fair credit score may get you prime plus 15%.
Not all credit card companies will advertise these rates upfront, but you can find the rates and terms on their website. For example, the American Express Platinum Card lists its purchase APR range at 18.24 to 25.24%, depending on your credit.
You generally won’t know your exact interest rate until you complete the application, but you can use this information to find the credit cards with the lowest APR ranges before applying.
Cash back and rewards program
You’ll run into various enticing cash back and rewards programs when choosing a credit card. The critical difference is that cash back is the credit card company effectively giving you a percentage of your purchases back in cash that you can use as statement credits or receive as a check.
Rewards credit cards allow you to earn points with each purchase and redeem the points for products and services the credit card company offers, such as gift cards, travel credit or hotel stays.
In general, reward points have more dollar-for-dollar spending value than cash back when redeemed. This is often your better bet if the credit card offers a high-value reward points program in valuable categories. Still, a cash back card may be an ideal option if you don’t want limitations on how you use the cash value.
Not all cash back and reward credit cards are equal, and some variations include:
Differing cash back and reward amounts
Differing cash back values for various types of stores
Rotating monthly category values monthly
Varying sign-up bonuses
Review the cash back or reward program and find the credit card offering the most cash back or rewards at stores you frequently shop. For example, if you’re planning to use this card heavily to purchase groceries, find a card offering the highest cash rewards or reward rate at grocery stores. However, if you plan to use this card in a wide range of locations, you may prefer to focus on the main cash back amount that applies to all purchases.
Credit score requirements
To be approved for a credit card, you must have a satisfactory credit score and credit history to qualify. While credit cards typically won’t advertise their minimum credit score requirement, you can get a good feel for general requirements through a quick online search for the credit card type and credit score requirements.
Additionally, the more perks and benefits a card has, the greater likelihood that it will have more strict credit score requirements. So, your typical rewards credit card may require a credit score from the mid-600s to the low-700s. However, premium rewards credit cards with high-value perks may require an excellent credit score of 740 or higher. A basic credit card with little to no perks may only require a low-600s FICO® Score.
If you have a credit score of 600 or lower, you may have to consider a secured credit card. This is like a traditional credit card, but you must send the credit card company a security deposit equal to the credit limit. This deposit protects the credit card issuer should you default on the payment.
Only applying for cards you’re confident you’ll get approved for is critical. Each credit card application puts a hard credit inquiry on your credit report, which can lower your FICO Score by five points or less.
Balance transfer promotion
If you’re hunting for a credit card to use as a balance transfer credit card — rolling a high-interest credit card balance to a lower interest, sometimes 0% APR, credit card — you’ll want to pay close attention to the balance transfer promotion.
To attract more applicants, many credit cards will advertise these promotions, which are often 0% APR for six to 18 months. However, you may need to review the credit card’s rates and terms to determine the balance transfer promotion.
You also want to check the balance transfer fee. These are generally between 2% and 3% of the balance you’re transferring, but some may be higher. So, before settling on a card just because it has a balance transfer promotion, verify that its balance transfer fee is in line with the competition.
Credit bureau reporting
All credit cards will report to at least one of the three major credit bureaus — Experian®, Equifax® or TransUnion®. But reporting to just one can negatively impact your ability to build credit with a credit card. This is because lenders tend to pull all three credit reports and use the middle score for qualification.
For example, say your Equifax, Experian and TransUnion FICO Scores are 600, 610 and 605, respectively, so you acquire a credit card to boost your scores. The credit card you accept only reports to TransUnion, bringing this score to 700 over 12 months. With a great TransUnion credit score, you decide it’s time to take out a mortgage, so the lender pulls all three credit scores for pre-approval. Your TransUnion score may look great, but there’s a chance your middle score remains at 610, meaning you would have gotten a similar result 12 months earlier.
This is why it’s essential to find a credit card company that reports to all three credit bureaus. While credit cards generally don’t advertise who they report to, you can contact their customer service before applying to ask about their reporting protocols.
Like balance transfers, many credit card companies will offer a low intro APR to entice new applicants to sign up and use their credit card accounts. These can be attractive offers — sometimes as low as 0% APR for 18 months.
Such offers are also a great way to start using a credit card without the fear of interest charges if you can’t afford to pay off your full balance every month. You can also use this to make a larger purchase and pay it off over time without interest.
Help maximize your financial gain with a credit card
Getting the right credit card is the first step, but you also want to maximize that credit card for financial gain. The financial gain comes from cash back, rewards points, other perks and building credit.
These tips will help you open the potential for financial gain from your credit card.
Use your card for everyday purchases and pay it in full
Instead of dipping into your bank account with your debit card for everyday budgeted expenses, use a rewards credit card. This will allow you to earn rewards for the purchase you plan to make. This can be your daily lunch, coffee, utility payments and even your rent if your landlord accepts credit cards.
Then, when the monthly statement arrives, pay off the full statement balance. Doing so allows you to take advantage of your credit card’s interest grace period and pay no interest charges. You can reap the rewards but pay none of the interest.
Automate your monthly payments
Late payments generally come with late fees, which start at up to $28 and rise to $39 if you’re late more than once in a six-month period. By automating your monthly payment, you can avoid these late fees and potential negative payment history marks on your credit report.
Most credit cards will allow you to set automatic monthly payments for the minimum payment, statement balance, full balance or custom amount. In most cases, the statement balance is the safer bet to avoid interest charges. However, if you’d rather not have that large amount paid automatically, you can opt for the minimum payment to avoid late fees.
Only spend what you can afford to pay off monthly
When you have a credit card with a huge credit limit, it can be tempting to make a big purchase and pay it over time. Even with a 0% intro APR, this can become a tough cycle. If you hit a rough financial patch down the road, you may no longer be able to afford paying your balance off before the promotion expires.
Work to use your credit card responsibly and only for items you can afford to pay off in full by the credit card’s due date.
Avoid the cash advance trap
When you need cash, it can be tempting to leverage your credit card’s cash advance feature. Cash advances are convenient but costly, as they generally have a significantly higher APR than regular credit card purchases. Also, they sometimes include additional fees. The average credit card cash advance fee is 5% of the advance or $10, whichever is greater, but this can vary by credit card company.
Choosing the right credit card may offer the opportunity for financial gain
Choosing the right credit card and using it responsibly can offer the opportunity for financial gain. However, you must first understand how to choose a credit card that is right for you. Picking the right credit card will ensure you get the best interest rate and credit card rewards while limiting annual fees, rejections and reporting by credit bureaus.
Have you struggled to keep up with your monthly credit card payments? The Tally†credit card debt repayment app can help. Our app assists in managing your credit card payments, and Tally offers a lower-interest personal line of credit that allows you to efficiently tackle higher-interest credit cards.
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†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the prime rate. Annual fees range from $0 to $300.