3 Personal Finance Tips for Choosing a Credit Card

With all the credit card offers you receive in the mail, it can be difficult to tell the differences among them, let alone choose the one that’s best for you. However, there are real differences between the various offers you receive, and it’s better to examine them before you get hit with charges you didn’t see coming.

Check the Interest Rate

One of the biggest benefits of having a credit card, according to Danny Payne, a Certified Financial Planner practicing in Southern California, is “the ability to access credit for unforeseen expenses. The line of credit allows folks to keep a smaller balance in emergency cash making nothing right now, and a larger balance in assets that produce yield, such as bonds. None of these benefits, however, pay off if a card holder is not paying off their card balance in full each billing cycle.” Especially if you carry a balance from time to time, check the interest rate on the card. Don’t be suckered in with low introductory rates unless you know you’re going to have the balance paid off before the higher rate kicks in. If you never carry a balance, you can focus your search more on other factors.

Pick Rewards You’ll Actually Use

“Most credit cards now come with some type of rewards,” says Alan Moore, a Certified Financial Planner practicing in Milwaukee, Wisconsin. “While earning points toward travel can seem like a great bonus, are you actually going to use them? Most people are best off choosing a cash back rewards option. Many times, you can earn one percent cash back, or one airline mile for every dollar spent, which is effectively the same thing. One mile is worth one cent, meaning one percent of what you spend.” Similarly, if the card offers points for merchandise, look through the rewards catalog to make sure there are items you’ll use or gift cards to places you already spend money.

Watch Out for Annual Fees

“Many folks miss the annual fee that comes with cards with great rewards,” cautions Moore. “They usually give you the first year free, then the fees kick in. Even though the fee many only be $40 per year, you may be better off getting a card with less rewards but no annual fee.” Though you might get extra rewards with an annual fee card, do the math to make sure it’s worth it before you apply. “Cards with annual fees can be worth the cost as they often offer better rewards than ‘no annual fee’ cards,” warns Payne. “Generally an ‘annual fee’ card must be used frequently to pay off.” For example, say you have a card that charges you a $50 annual fee, but gives double cash back — 2 percent — on travel expenses. It sounds like a great deal, but you’d have to spend $5,000 on travel during the year to make up for the annual fee.

Using the Credit Card

Once you’ve made your choice, your financial responsibility is just beginning. The most overlooked part of getting a credit card, according to Payne, is “the danger of running up a high balance. People know the dangers of credit cards, but often fail to establish and follow personal guidelines for how the card is used.” In addition, if you’re planning to transfer a balance to your new card, remember that interest starts being charged immediately after the transfer. “Even though the card may offer zero percent interest for 12 months, you may get hit with high interest rates on balances transferred from other credit cards,” says Moore. “This stops you from simply moving the balance from card to card, trying to avoid paying interest.”