How to pick the right credit card for your financial goals
Over the past year, I’ve been helping a friend rebuild his finances. I worked with him to file for bankruptcy. Because he owed a bank for past overdrafts, he was denied a checking account. So when he recently got a job, we found him a free prepaid debit card to use for direct deposit. Then this past week he asked me about how to pick a credit card.
He’s primary reason for wanting a card was to begin rebuilding his credit. That’s all I needed to know to help him pick the best card for his financial goals. We selected a secured card that he instantly qualified for and will help him improve his credit.
That experience prompted me to write this article. I’ll break down the three major things to consider when choosing a credit card. Then, we’ll talk about some of the best options on the market for different situations.
Factors to Consider When Choosing a Credit Card
There are three major factors to consider when picking a credit card:
- How you’ll use the card
- Your credit situation
- Your specific financial goals
Let’s look at how each of these factors plays into choosing a card.
1. How you’ll use the card: How you will use and manage the card is important for several reasons. First, will you pay off your balance in full each month? One of the best kept secrets about credit cards is that they offer an interest free loan each and every month you use the card. To take advantage of this deal, however, you must pay off your balance in full by the due date. If you do, the interest rate the card charges won’t matter because you won’t be paying interest.
If you’re going to carry a balance, though, the interest rate may be the most important factor to consider when choosing a credit card. The interest rate will make a huge difference in your minimum payments, and in how much you pay in interest overall.
Second, if you plan to take advantage of rewards offered by many cards, knowing where you’ll use the card will help you pick the best offer. Some cards, for example, pay higher rewards when you use the card for travel expenses. Other cards pay top rewards for purchases at gas stations or the grocery store. Knowing where you’ll use the card most will help you maximize rewards with the right card.
Finally, if you plan to travel and use the card overseas, picking one that doesn’t charge foreign transactions fees will save you a bundle.
2. Your credit situation: Knowing your credit score will help you determine for which cards you’re likely to qualify. This has several benefits. First, there’s no sense in applying for an American Express Platinum card if your credit is terrible. Second, applying for too many credit cards can actually harm your credit further (see our article on how credit inquiries affect your credit score). So it’s best to apply for just one or two cards for which you’ll most likely be approved.
If you don’t know where your credit stands, you can get your free score from Credit Sesame. Note that unlike many “free trials,” Credit Sesame doesn’t require a credit card.
3. Your financial goals: It may seem odd to think about financial goals and credit cards at the same time. So much has been written about the “evils” of credit cards that we often forget they are powerful financial tools.
For example, 0% balance transfer cards can help you pay down your credit card debt faster and cheaper. Travel rewards credit cards can help defray the cost of your next vacation. And cash back cards can lower the cost of everything you buy. The key is to consider how credit cards can help you financially before deciding on the best card for you.
A Credit Card for Every Situation
There are literally thousands of credit card options out there. To help you sort through all of them, here are some common scenarios along with some recommended card options:
You carry a balance month-to-month, but are paying down your debt
This was exactly the situation my wife and I were in several years ago. Our strategy was simple. We transferred our existing debt to 0% balance transfer cards. Once transferred, we didn’t use the cards for anything else. Instead, we had a second rewards card for everyday purchases that we paid in full each month.
In terms of balance transfer cards, I’d recommend either the Discover it® 18 Month Balance Transfer Offer, Citi® Diamond Preferred® Card, or Capital One® Platinum Prestige Credit Card. Each offers some of the longest 0% balance transfer deals you’ll find anywhere. If the size of your debt requires transfer to more than one card due to credit limits, each of these options is a winner. They do come with a 3% transfer fee, but it’s worth avoiding the interest payments. You’ll find these offers and others in our list of 0% balance transfer offers.
As for your second card, I’d pick one of the cash back or travel rewards cards listed at the end of this article.
You carry a balance month-to-month, and are not paying down your debt
If you have credit card debt and the situation is getting worse, I’d still transfer as much of the debt to 0% cards as you possibly can. For current purchases, however, I’d forgo a rewards card and instead get a card that offers 0% on purchases. You’ll still want to pay off as much of the debt as you can each month, even with these zero percent deals. Why? Because just like balance transfer cards, the introductory rate will eventually end. The longest 0% on purchases deal you can find today is about 18 months, and you can find a list of these 0% on purchase cards here.
You have bad credit
If you have bad credit, you likely won’t qualify for a traditional credit card. If you do, the fees, the interest rate, or both are likely to be higher than a hippie at Woodstock. As a result, a secured credit card is often the best option. My personal favorite is the Capital One® Secured MasterCard®, but you can find a list of the best secured credit cards here.
You have no credit
: No credit and bad credit are two entirely different things. If you are just starting out, you may not have any credit at all. Typically, people first start to build credit through school loans, a car loan, or perhaps a store credit card. Unlike bad credit, you don’t have a history of making bad financial decisions. You don’t have any history at all.
If you are a college student, one of the many student credit cards is a good option. If you are not a student, you still may qualify for a good card. It will depend on the underwriting standards of the credit card issuer. Your income and length of employment will be key factors. One of my favorite cards in this category is the Capital One® Platinum Credit Card
You’re a world traveler
If you travel often for business or pleasure, a travel rewards card could offer you huge benefits. For my money, the two top all-purpose travel cards are the Chase Sapphire Preferred Card and the Capital One® Venture® Rewards Credit Card. I carry the second one, but both cards are great. If you travel extensively on a single airline or stay at a single hotel, then either an airline card or a hotel rewards card would be a great addition. Alternatively, you could go with the Starwood Preferred Guest® Credit Card from American Express. I’ve used this card for several years now. Starpoints are great because they can be used at a number of hotels or converted into miles on many airlines.
You believe that cash is king
Cash back rewards are a great way to earn money on your everyday spending. For many, cash is a great alternative to points and miles cards. Particularly if you don’t travel a lot, figuring out want to do with non-cash rewards can be a hassle. When it comes to cash back cards, here are the top four picks:
- Blue Cash Preferred® Card from American Express
- Discover it®
- Chase Freedom MasterCard
- Capital One® Cash Rewards
As you can see, there are so many options out there when it comes to choosing a credit card. If you have other questions about how to pick a credit card, let us know in the comments.