In spite of the dangers of excessive credit card use, we are still fortunate to have a very competitive credit card market that offers a nearly limitless choice of products. In fact, choosing the best credit card can be an overwhelming task. The key to finding the right one is to determine what kind of person you are when it comes to managing your personal finances.
Are you the type to pay off your balance in full every month? Or is your balance so big that you can only afford minimum payments? Do you use your credit card to provide yourself short-term loans? Or do you regularly transfer balances to avoid expiring introductory APRs?
Even if you do not know what type of credit card user you are, your bank certainly does.
How the Credit Card Industry Views Customers
Deadbeats and Revolvers
Long ago, the banking industry determined that their credit card holders were actually comprised of two different groups:
- Those who paid their bills in full (Deadbeats).
- Those who usually carried a balance (Revolvers).
Industry executives have been known to casually refer to the first group as Deadbeats. They are the people for whom a credit card is just a method of payment. When their bill comes, they always pay their balances in full and on time. They never pay interest or late fees as they hate all fees. In fact, they are essentially getting a free loan from the time they make a purchase until the due date when they pay off their balance.
Their perpetual use of the bank’s money for free is what earns them their nickname. Though this term is derogatory, being a deadbeat in the eyes of your credit card company is actually quite a compliment to your personal finance skills.
In truth, the banks value Deadbeats because they generate merchant transaction fees every time they use their card and are least likely to default on their debt.
A Revolver is the nickname that people in the credit card industry use to refer to people who carry a balance. Revolvers use a credit card not just as a method of payment, but as a method of finance. Each month they only pay a portion of their balance or feel that only making their minimum payment will suffice as a long-term strategy.
In either case, the rest of their balance revolves to the next month, hence their nickname. All this time, they accrue interest on the existing balance and each new purchase. This additional interest keeps adding to their balance, making it harder to pay it off. Most Americans who have credit cards are Revolvers.
How This Affects Your Choice of Credit Cards
If you are a Deadbeat, you really have no reason to examine the interest rates of your credit cards. Your only concern should be maximizing rewards, such as cash back and loyalty points, while minimizing expenses, such as annual fees and foreign transaction fees.
If you are a Revolver, your only consideration should be paying off your debt in the hopes of some day joining the Deadbeats. It is not an easy task. In fact, getting out of the habit of revolving debt is often as difficult as breaking a substance addiction. There are a few key features Revolvers should focus on, but the most important is the interest rate. Find the card with the lowest APR to help you work your way out of debt. Most often, these cards will offer very few rewards opportunities to compensate for the fact they are providing low interest rates to a credit risk: you.
Credit Card Features to Look for
Here are the most important features you should consider when choosing a credit card, the priority of which will depend on where you fall in the Deadbeat-Revolver spectrum.
1. Annual Fees
While most people immediately assume that credit cards with no annual fees are the only way to go, some of the best rewards cards do charge an annual fee. Moreover, these rewards cards may offer perks that are worth considerably more than the fee itself.
For example, the Delta SkyMiles Platinum card has an annual fee of $150, but one of the benefits it offers is a free companion travel certificate. If you utilize the certificate, you will almost surely get at least $150 in value in addition to the other rewards provided by the card. Remember, while credit cards without an annual fee offer a significant benefit, you shouldn’t immediately discount cards that charge an annual fee.
2. Annual Percentage Rate (APR)
The APR, which is an important factor for Revolvers, represents the rate at which your balance is accruing interest. APR stands for Annual Percentage Rate. If you had the same balance the entire year, you could multiply your APR by your balance, and that is how much interest you would pay.
Of course, your balance changes daily and credit card interest is calculated on the basis of your average daily balance. If you checked your balance at the end of each day, added each balance together, and divided the total by the number of days in your statement cycle, that is the amount of money your interest rate would be applied to. The interest accrued for that month will be approximately 1/12 of what the annual interest would be on that balance.
When shopping for a credit card by APR, the lower the number, the less interest you will pay. But comparing interest rates is actually getting harder. Most banks now offer different interest rates based on the applicant’s credit score. As a result, unless you have very good credit, it may be best to only apply for the cards that offer a single, fixed rate.
3. Sign-up Bonuses
Another wildcard in the rewards game is the sign-up bonus. As a Deadbeat, you are able to shop around for a great sign-up bonus since you don’t need to worry about higher interest rates. But Revolvers should recognize these bonuses as a trick to entice them into using a card with a higher interest rate.
Lately, sign-up bonuses have reached stratospheric heights never before seen. The British Airways Visa Signature card had a promotion where you could earn 100,000 miles, and there are several other cards still offering 50,000-75,000 bonus miles to new applicants.
Similarly, Capital One had their “Match My Miles” promotion where they granted 100,000 miles that could quickly be redeemed for a $1,000 statement credit. Since you can’t (and shouldn’t) apply for every card you see, the most experienced rewards card users will wait for the very best offers before applying. Gaining a huge sign-up bonus can represent the easiest way to earn points and miles, especially for modest spenders.
4. Balance Transfer Fees
Transferring an existing balance from one credit card to another is a method used by banks to gain a Revolver’s business. The incentive is that you can transfer your balance to your new card and enjoy lower interest rates than you were previously incurring on your old card (sometimes this rate is 0% for an introductory period).
Some Revolvers even use this method to extend low introductory APRs from one card to another. The main drawback, however, is a one-time balance transfer fee equal to a set percentage of the balance you are transferring, usually between 3% and 5%. Thus, the new rate must be low enough to offset the balance transfer fee.
For example, imagine you have a $10,000 balance on a card with a 15% APR. If you never used the card again for new purchases, you would incur $1,500 in interest if you didn’t pay down the balance over the year. On the other hand, consider the option of transferring your balance to a 0% APR balance transfer credit card offer for 12 months. You could then pay off the balance before the introductory period expires. You would pay no interest, but you would pay between $300 and $500 in balance transfer fees. Such a balance transfer would save you money in this scenario.
On the other hand, if your interest rate was 5% and you could pay off your balance in six months, you would pay only $250 in interest. In that case, the transfer fee would cost you more than keeping the balance on the original card.
5. Foreign Transaction Fees
These fees are generated by most credit cards when you make a purchase that is processed outside of the United States. Fortunately, there is a growing list of credit cards without foreign transaction fees. If you travel out of the country regularly, make a point of using one of these cards on your trips.
6. Rewards: Cash Back vs. Loyalty Points
Virtually all rewards credit cards offer either cash back or loyalty points or miles. Cash back has the advantage of being the most versatile, liquid, and the easiest to quantify. The best cash back credit cards have a rewards return rate of 2%, and some even offer a higher return during a predetermined introductory period or for certain categories of spending.
On the other hand, loyalty points accumulate at a set rate for every dollar you spend. These points are redeemable for specific services or products like plane tickets, hotel stays, electronics, or gift cards. Ultimately, you will need to decide whether the rewards offered by the loyalty programs are more valuable to you than a cash back card.
Often, this decision will come down to how relevant the rewards program is to your daily lifestyle. For example, if you are a frequent traveler, it is likely the rewards offered by a top airline or hotel credit card (i.e. best travel rewards credit cards) will exceed that of a cash back card.
Keep in mind that rewards are most valuable to Deadbeats since these cards are often accompanied by higher interest rates that could further cripple a Revolver’s debt situation.
7. Introductory Rate
One tool that a Revolver can use to get out of debt is a low introductory APR. Many cards now offer a 0% APR or a reduced introductory rate on new purchases and balance transfers for a set period of time. For example, the PenFed Promise card offers a reduced 7.49% introductory APR on balance transfers for 36 months, while the Citi Diamond Preferred MasterCard offers a 0% introductory APR on both purchases and balance transfers for 18 months. When you are looking for a card with a low introductory rate, have a plan to get out of debt before your introductory rate expires.
Not all cards are accepted at all merchants. Visa and MasterCard have the broadest acceptance in the United States with American Express and Discover not too far behind. Overseas, Visa is more broadly accepted than MasterCard or American Express. Discover is notably absent from many countries. If you plan on traveling, here are some things to consider when using credit cards overseas.
9. Secured Credit Cards
A secured credit card is a type of product typically offered to people with little credit history or a low credit score. These cards require you to make a deposit first, which then becomes your effective credit limit.
You can think of them as a hybrid of credit and debit cards. Like a debit card, you cannot withdraw more than you currently have on account. At the same time, they still include all the purchase protections that federal laws require for credit cards.
For example, checking into a hotel or renting a car with a debit card may be possible, but it can be very difficult. A secured credit card is treated by a merchant just like any other card. This can be a great tool for people who want the convenience and protections that a credit card offers without the possibility of going into debt. As with sub-prime cards, be very careful to avoid ones that are filled with fees.
10. Poor Credit
Beware of cards marketed to sub-prime borrowers that are full of penalties and fees. If you are in this situation, just resist the temptation to get a credit card. Such a card will probably force you deeper into a financial hole.
11. Business vs. Personal Cards
There used to be almost no difference between a business card and a personal card. Since the CARD Act of 2009 only affected personal cards, however, business credit cards now have less consumer protections. If you use a business card, you need to be aware of this shortcoming.
If you simply want to separate your business transactions from your personal ones, there is no reason why you can’t use a personal card to serve that purpose.
12. Other Perks
A hot trend in the credit card industry is to offer less tangible perks.
The Continental Airlines Presidential Plus card is one of the top travel rewards cards because it offers nearly every courtesy granted to their most frequent flyers, from lounge access to priority check-in and security.
Similarly, the Delta Reserve credit card will grant you upgrade priority over equally qualified flyers who don’t have this card. Even the Southwest Airlines Rapid Rewards credit card is enhanced by the possibility of earning status in their system and being eligible for international award tickets on other airlines. Consider whether such perks add considerable value for you.
13. Online Capabilities
Fewer people are relying on paper statements as almost everyone now has an Internet enabled bank account. Regardless of which card you choose, you should have the ability to manage your account online. You will see the same interface for all cards issued by the same bank, regardless of whether or not they are affiliated with another brand.
Choosing a card offered by a bank where you have an existing relationship can be a smart idea. This arrangement allows you to make automated transfers from your checking or savings accounts to your credit card. It also frees you up from the hassle of having to learn a new bank’s website.
Several credit cards including Chase Freedom, Chase Sapphire, and Chase Slate feature the Blueprint payment program. This sophisticated program can save you significant amounts of money by allowing you to pay off some balances in full while only paying interest on select purchases. This innovative program also comes with powerful online money management tools and is perfect for people trying to get their finances in order.
As you can see, choosing the right card can be overwhelming. But you can make the process simpler by considering your preferences and habits.
In short, the best credit card for you will depend on whether or not you are carrying a balance. For those who do carry a balance, finding a card with the lowest interest rate will always be the highest priority. Keep in mind that maintaining or improving your credit score will make this process much easier - which means, at the very least, paying the minimum balance on time every month and keeping account balances below your credit limit.
For cardholders who can confidently pay their balance on time and in full, there is a world of rewards out there to choose from. Understand all of the factors that differentiate one card from another, and only then can you find the card with the right combination of features that best fits your needs.
Which credit cards do you carry and why?
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