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How To Pick A Credit Card

June 03, 2019
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When it comes to improving your finances, it's likely that you've heard a lot of mixed messages about using credit cards. Some people think that credit cards are the devil reincarnate, while others offer classes on how to use credit card rewards points to never pay for anything again. It's a confusing topic altogether, and when opinions get added to the mix, forget about it! So today, I'm not here to convince anyone who doesn't want to use a credit card that they should use one. Instead, for those who are already pro-credit card, I'd like to let you know 5 questions you should ask yourself before applying for a credit card.

1. Can you avoid paying interest?

When managed well, credit card rewards can afford you a number of opportunities, like saving money on items you need, providing a greater level of fraud protection to purchases made online or while traveling, and even access to exclusive events. But none of these things will truly benefit you financially if you're making purchases that you truly can't afford. Credit cards should be used so that you can take advantage of their benefits, not so that the credit card company can take advantage of you with high interest charges. So before choosing any card at all, make sure that the purchases you plan to make with the card are ones you can pay off in full before any interest accrues on your balance.

2. Is your credit score high enough to qualify? 

I'm sure we'd all like to get a credit card that offers us discounted plane tickets, or waives fees for other purchases in our life. And there are cards out there that offer resources in all those areas ... for those with the credit score to qualify. The more robust a card's rewards are, the higher your FICO score likely has to be in order to be approved, If you see a card whose average cardholders have FICO scores in the 750s, and yours is 100 points lower, don't fool yourself and send in your application anyways. Doing so will only damage your score, as the company with whom you've applied will make a credit inquiry as a part of the application process. Credit inquiries account for 15% of your FICO score, and it's not worth having your credit dinged by an inquiry if you don't even get the benefit of using the card afterwards. But how do you know your chances of being approved? Credit monitoring services such as Credit Karma will not only show the average credit card scores of customers using a particular card, but also recommend cards for which you have a good chance of being approved based on your particular score.

3. Does it reward you for purchases you (have to) make frequently?

Notice I emphasized purchases that you HAVE TO make frequently. Let's break down the difference: you have to buy groceries. A credit card that gives you 2x-3x rewards points or 2%-3% cash back for groceries is, on the surface, an attractive option. You don't, however, HAVE to buy clothes from your favorite retailer every month. So a card that offers 20% off a pair of jeans or a blouse is not helping your finances, it's harming them. Never open a new card and put your credit on the line for something you either only buy once or twice, or something that doesn't benefit you financially. You don't need a Home Depot card because you bought a screwdriver one time, and you don't need an Amazon credit card so you can pay less for impulse purchases you didn't need in the first place. As I like to say, it's not a sale if you can't afford or don't need what you're buying, it's just a slightly less expensive bad idea!

4. Will you use it enough to justify the fee?

While not all cards carry an annual fee, some premium cards charge as much as $500 per year. Oftentimes they come with great perks, such as concierge services, access to airport lounges and more. In order to make sure it's worth it, you need to be using your card enough so that the points or cash you're earning far surpasses the fee paid to the company. If you're paying $500 per year but only earning $400 worth of rewards points, you might have found yourself in a situation where your card doesn't match your spending patterns. Before applying for a card with any annual fee, big or small, see what categories they reward with points multipliers (groceries, gas, restaurants, etc.) and compare them with your last few months' spending. Only apply if you spend enough in those areas to not only meet the fee, but exceed it to the point it's worth the added expense.

5. Do the points redeem 100 to 1?

It's easy to get swept up in the marketing for different cards that offer you 2x-4x the credit for certain purchases. But the more important question to ask when evaluating those rewards is what is their redemption value? The redemption value of a reward point is essentially how much money it represents. Ideally you have a card that redeems your points at 100 to 1 at a minimum, meaning each point is worth the equivalent of a penny. So if you cash in 100 points, you're cashing in $1. On the positive side, some companies will actually increase your points' redemption value when you use them for certain purposes. As an example, a company might increase your points value by 25%-50% if you redeem them for travel purchases. Unfortunately, not all companies who offer these points multipliers will redeem your points at the same rate; some purchases may be redeemed at much lower amounts, such as 100 to 0.5, meaning that your reward point is worth about half a penny! Depending on the redemption rate for your purchases, they might not be worth as much as you originally thought, and it makes offers for cards like pure cashback cards more attractive. What is a cashback card? A credit card that rebates/refunds a percentage of what you purchase for actual cash. Cashback cards are gaining in popularity because you know exactly what you're getting. If the cashback says you get 2% for groceries, you KNOW you get a full 2 cents for every dollar spent on groceries. If you don't have a cashback card but your current credit card offers a predictable and reasonable redemption value for your rewards points, that's great. But if you find yourself unable to figure out which purchases are redeemed for which amounts, it might be worth making a switch.

Like I said at the start, there will always be people who see no value in having credit cards as a part of your life. There are others who as a course of their job, or by nature of their income, not only need credit cards but benefit from them greatly. If you have an interest in adding another card or getting one for the first time, ask yourself these questions so that you can do so responsibly. And if used responsibly, a credit card can be a positive addition to your financial life.