Before you get down to the details of choosing a credit card, you need to decide how you will use it. Will you pay it off every month faithfully? Will you usually carry a balance? How you use it will determine how to rate credit cards. We'll look at them separately.
If you plan to carry a balance...
- Probably the biggest issue here is interest rate. Interest rates on credit cards can run hundreds, even thousands of dollars a year. So the lower the interest rate, the less you'll have to pay. Interest paid on credit cards is essentially wasted money. Look for the lowest rate possible and try not to pay any annual fees. That's like paying a "bonus" interest payment to the lender!
- A quick word here about those "teaser rates". They can really benefit you by lowering your interest - even for a short period of time. But beware of "chasing" the rates by opening new accounts every six months to snag that teaser rate. You will lower your credit score if you continue to open new accounts. That in turn will stop you from getting that super low rate. You can use them, just do so wisely!
- Other benefits like points, miles or cash back awards shouldn't really figure into a search for a card you are going to carry a balance on. If you're paying interest on your purchases, you are paying dearly for those benefits. Save those types of cards to use when you are diligent about paying it off every month.
If you plan to pay it off in full each month...
- Here is where I'd look at what the card offers you. If you love to travel, you might look for an airline rewards card. But think sensibly here. If you NEVER travel, don't get a card with airline rewards points in the "hopes" that you might someday take a trip. Find a card that gives you something you'll actually use. There are all kinds out there these days.
- You should definitely check for annual fees here as well. Some cards like American Express almost always come with an annual fee. That doesn't mean you should never get one. There are valid reasons to have an American Express. We'll cover some of those below. But typically, it's better to find a card with no annual fees. Otherwise you lose some of the benefit of having the rewards card.
- Make sure you check the terms. Some cards offer approximately 20 days from statement date to payment date. You don't want to be late; then you're paying interest and that's wasted money. Most cards will allow a 25 day grace period. In other words, if you pay the card off in full each month, there's no interest due. However, a few out there charge interest from the date of purchase to the paid date. There is no grace period. It's a little sneaky and most don't do it, but you should check, just to make sure.
- If you travel a lot, either for business or pleasure, a card like the American Express may come in handy. It typically offers additional travel insurance for travel purchased using the card. It's also the card most used by businesses.
So figure out how you will use the card and stick with the plan for that particular card. Choose the card based on how you plan to use it.