How To Choose The Right Credit Card For You

   Credit cards offer a variety of benefits, but with so many choices out there, how do you know if your card is the right one?

   While many of us have at least one credit card, these have really stuck out as the way of the future recently. Reeling from the coronavirus, the payment processing industry has fully embraced credit cards, with many stores simply refusing to accept cash or other contact-laden payment options. With increased usage of credit cards, it is more important now than ever to ensure that you have the right card for you.

Why Credit Cards?

   Credit cards offer the convenience and flexibility of payment virtually anywhere. Newer cards also have a “tap” function that allows you to pay under a certain amount without using the keypad. That technological capability made credit cards a clear winner as fear of germs and viruses escalated.

Factors to Consider When Choosing A Credit Card

   Credit cards come with a whole list of different costs and benefits, which can make the choice unnecessarily complicated. Three of the elements found on all cards are:

Interest Rate

   The interest rate is displayed as the annual percentage rate (APR). This is the interest that you will be responsible for if the credit card is not fully paid on time. That interest rates can fluctuate quite significantly, reaching 20% or more! While this is an important number to know, if you use your credit cards responsibly and pay them off in full every month, you won’t incur any of those high interest charges.

   Consider your own financial habits. Do you pay off your statement in full every month? If so, the APR isn’t really influential in your purchasing decision. If, on the other hand, you sometimes miss a payment, or only pay the minimum balance, the APR interest rate can have significant financial implications.

Fees

   The list of fees associated with each credit card can be both extensive and confusing. Some of the more common fees that you should be aware of are listed here:

The annual fee. Some cards come with an annual fee, often designed to give you access to more or better perks. While this sounds good on the surface, in reality many of those cards the additional perks don’t warrant the additional fees.

Cash advance fees. Cash advance fees are paid if you need to withdraw cash from your credit card account. While most companies don’t accept cash right now during Covid-19, there are always a few exceptions. In those rare situations, it’s always good to know what the fees are. These are either a flat amount, or a percentage.

Foreign currency charges. Credit cards often have a modifier on foreign exchange rates. For example, one of my credit cards charges me 2.5% more than the current market rate on all non-Canadian dollar transactions. If you do a moderate to significant amount of shopping in another currency, it might be worthwhile getting a credit card in that currency to minimize those extra fees. 

Statement fees. Statement fees have certainly become more frequent over the past few years. These fees are levied on print or re-print of account statements, as a type of environmental fee to encourage people to go paperless. These types of fees also can encompass transaction investigation fees, when you ask your credit card company to investigate suspicious or unknown transactions on your account.

Insurance premiums. This final type of fee is for balance insurance. These fees are especially prevalent on cards issued to individuals with no or low credit scores.

Perks

   The main reason credit cards are preferred by consumers over cash or debit transactions is the ability to earn different types of perks. 

   The size of the benefit is often contingent upon at least one of two factors. Your salary, or the annual fee. Bluntly put, the more money you earn, the better the rewards you’re entitled to. There are three types of perks that are typically offered.

Reward Points 

   Reward points are as varied as the companies offering the credit card. This is probably the biggest deciding factor between credit cards that you’re interested in. Do you like to travel? A card that rewards with airline tickets or Air Miles would fit your lifestyle. Like free groceries? That’s a different card. What about a shopping aficionado? There are likely reward points for your favorite boutique as well.

   Matching your reward points with your interests and values is the best way to get the most out of your credit card. For example, I have two different cards, one that rewards groceries and gasoline purchases. The other card has a more general reward point system, with rewards used for travel booking. Both of these cards work well for me, rewarding me where I spend my money, with rewards that I value because they fit my lifestyle. 

Cash Back 

   Cash Back rewards cards are another extremely popular option. Instead of receiving reward points, these cards return a certain percent of your purchases. Effectively, these cards give you a small discount on all qualifying purchases. 

   If these cards are of interest to you, be sure you do a quick calculation to see your required monthly spending to either qualify or break-even on those annual fees. 

Insurance, Hotel Upgrades, and/or Car Rental Upgrades 

   Another perk that is often offered is various kinds of insurance. For example, both my credit cards offer different types of insurance. One gives me trip cancellation insurance for any travel booked on that card, while the other insures rental vehicles. These are often the less-advertised perks of the cards, but are actually extremely valuable if used effectively.

How to Choose the Right Credit Card for You?

   Knowing what the interest rates are, the fees, and the rewards will help you shape your decision. To help you make that decision, think about the following questions:

Do you always pay your credit cards on time?

   If not, start doing so now. As you build up that financial discipline, you should get a card with the lowest interest rate possible. No amount of rewards will make up for extra interest charges.

Do the rewards from your necessary spending justify the fees?

   You shouldn’t feel pressured to spend simply to make the card worth it. If you have the right card, the purchases you’re already making should bring you out ahead after considering the fees associated with the card.

Are the rewards aligned with your lifestyle?

   Being rewarded is nice. But this is your decision, so make sure that the reward points won’t just sit around like that giftcard to the store you’ll never go to. The perks should mesh well with your lifestyle, so that you use them, and actually see the benefits. 

The Bottom Line

   Credit cards have a place in everyone’s financial fortress. Used effectively, the rewards and benefits can help you immensely. But, that comes at a cost. Financial discipline is necessary to avoid insanely high interest charges. Paying 20% APR interest even once hurts, and makes it that much harder to stay on top of your finances. 

   If you have the discipline to know your budget, and stick with it, credit cards will reward you handsomely.

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