When used correctly, credit cards are helpful financial tools. Rewards programs offer opportunities for free and discounted travel and even cash back on everyday purchases. They serve as an emergency backup source of funds while you build your emergency fund, as well.
Unfortunately, credit card debt is a crippling problem for many people. While no one opens a credit card account thinking that they’ll run up the balance on unnecessary purchases, make only minimum payments, and live with the debt for years, that’s often what happens.
Before you commit to using a credit card and paying the bill, which may include high interest rates and fees, take the following information into consideration.
There’s no one-size-fits-all credit card
Since your financial goals and habits are unique, you’ll need to conduct some research and learn about your credit card options. If you travel frequently, a rewards credit card earning points that you can trade in for hotel stays, upgrades, flights, and other travel perks may be a smart choice. If you carry a balance on a few different high-interest cards right now and you’d like to consolidate those cards and pay a lower interest rate on your current debt, look for a credit card that offers a low introductory APR on balance transfers.
For most people, a straightforward cash back card that allows you to accumulate rewards by using the card for everyday purchases is a good choice.
Here are some questions to answer that will help point you in the right direction:
- Will you carry a balance from month to month?
- Have you had problems handling credit card debt in the past?
- Do you have a good credit score?
If you’ve struggled with debt in the past or if you doubt your ability to resist using a credit card for frivolous purchases, a simple cash back card with a low credit limit that you pay off each month is the safest choice.
- Do you travel frequently?
- Do you travel to the same area of the world on the same airline frequently or do your destinations vary?
- Do you have the income and discipline to pay off your balance in full each month?
Travel rewards credit cards offer lucrative sign-up bonuses and a dependable way to reduce your travel expenses. However, if you carry a balance, incur late fees, or sign up for a credit card offer and then fail to meet the requirements for the sign-up bonus, you’ll lose the travel rewards game.
- Do you have an emergency fund in place?
- If you have an unexpected expense, could you cover it with savings?
For many people, a credit card is for emergency use only. In this case, rewards programs matter less than finding a credit card with no annual fee and a long-term interest rate that’s manageable.
Are you looking for a credit card for bad credit or is your credit in good shape?
Would you like to simply use your credit card for everyday purchases and pay the bill in full each month?
A cash back card with rotating bonus categories may be your best choice. For example, some cards offer 1% cash back on every purchase and 5% cash back on gasoline and groceries for one quarter. Then, the bonus category changes to 5% cash back on restaurants and wholesale clubs. With this type of card, your everyday spending helps you earn a cash back bonus without racking up a lot of long-term debt.
If you have bad credit, consider a cash back card designed for your financial situation. These cards are usually secured with a deposit, but they help build good credit and offer rewards.
Consider the interest rate
With any type of credit card, paying off the balance in full each month is a smart move. It protects your financial future by saving you from paying high interest rates. Whether you choose a card with a fixed or variable interest rate, your ultimate goal should be to never pay interest on your purchases.
Making even one payment after the due date could trigger an interest rate increase. You’ll also incur high late fees and reduce your chances of receiving a credit line increase in the future. Before you choose a credit card, commit to the idea of paying off the balance in full each month and make the payment automatic so there’s no chance that you’ll forget.
Pay attention to your credit limit
Your credit limit indicates the amount of money the credit card company is willing to allow you to charge. Of course, you can pay off the balance in full and start over each month at zero.
Credit card companies that specialize in helping people with bad credit may offer a step-up program that permits credit line increases after a certain number of monthly payments are made on time.
In most cases, you can’t dictate the amount of your credit limit. It depends on your creditworthiness and the credit card company’s preferences.
Understand the credit card terms
You’ll find information about the card’s terms in the account disclosure statement. Reputable credit card companies are transparent about their fees and APR, so you shouldn’t have any problems comparing one card to the next.
- Amount of the annual fee
- When the annual fee is due (some companies charge this fee yearly and others break it up into smaller monthly or quarterly charges)
- Terms of the sign-up bonus
- Terms of the rewards program
- Credit limit
- How the company determines your credit limit and when you can ask for a higher credit limit
- Late payment fees
- Returned payment fees
- Over-the-limit fees
- Fees to add an authorized user to your account
- How to contact customer service
- APR (Annual Percentage Rate) for purchases
- APR (Annual Percentage Rate) for cash advances
- Penalty APR and what actions trigger the penalty APR
- Balance transfer fees
- Cash advance fees
- Foreign transaction fees
The most important part of choosing a credit card is understanding your own needs. Set yourself up for success by choosing to work with a reputable credit card company that offers a product to help you build credit and reach your financial goals.