How to choose a credit card - 5 easy steps Learning how to choose a credit card is a lot like learning how to invest in index funds: there a...
How to choose a credit card - 5 easy steps
Learning how to choose a credit card is a lot like learning how to invest in index funds: there are 5 steps and it's easy to do once you know what you're doing.
Just like riding a bike, it is something that everyone should learn at some point in life.
Learning how to choose a credit card solves two big problems people face with credit cards today:
- Don't use a credit card at all.
- Using a credit card, but not using it to the best of its ability (like the new Apple Card).
Simply put, credit cards pay you to shop! It's like having everything for sale. As long as you use them responsibly and pay them on time, they're a great tool for getting a discount on everything you buy and building your credit to help you with other financial goals.
Below are 5 steps to guide you through how to choose a credit card and make sure you're getting the card that gives you the best rewards or cash back possible.
1. Check your Credit Bureau
The first step in learning how to choose a credit card is to understand your credit bureau.
In short, a good credit bureau means that you are a reliable consumer and, therefore, can obtain credit cards with better rewards. A bad credit bureau means you are risky and probably need to spend more time building your credit before you can get high reward cards.
For example, in the US the credit bureau is made up of 5 parts:
- Payment history [35%]
- Utilization [30%]
- Length of credit history [15%]
- New Credit [10%]
- Types of Credit [10%]
Those 5 parts are put together to give you a numerical score. That you will fall somewhere on this scale:
- 800-850: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Acceptable
- 300-579: Very poor
You can learn more about how BC Credit Scores are calculated and what they mean. However, when it comes to choosing your next credit card, understanding your credit score will help you understand which cards you can get approved for.
Most cards will say what score is needed to have a better chance of passing.
Usually:
- Good scores can apply to different types of rewards credit cards.
- Average scores can apply for credit cards for fair credit.
- Lower scores may apply for cards that are good for bad credit.
If you need to improve your score, you'll probably need to start with a card designed for someone with bad or fair credit.
2. Calculate your expenses
The next step in choosing a credit card is to calculate your expenses, which include:
- How much do you normally spend per month?
- What types of “categories” do you spend on?
When I say categories, I mean things like restaurants, travel, or grocery stores.
You don't have to count whether you bought a banana or an apple last week, or whether your last purchase was jeans or sweaters. But you need to know how much you spend shopping online compared to grocery stores.
Now, save this information until step 4.
3. Determine the category of card you are interested in
The first major card category you need to decide on is whether you want a credit card with no annual fee or a credit card with an annual fee.
The general rule of thumb is that those who spend more and have a good credit score generally choose cards with annual fees. That's because the higher rewards those cards offer generally make it worth it by offsetting the cost of the annual fee.
On the other hand, those who spend less each month and/or have a lower credit score often opt for credit cards with no annual fees.
After deciding between an annual fee or no annual fee, it's time to decide what type of rewards you value most. Some cards simply offer cash back, while others offer travel points, hotel points, airline points, and many other types of rewards or points. You need to make sure the category of card you're applying for rewards you with something you'll use.
If you don't like to travel, don't sign up for travel rewards cards!
4. Do the math
Once you know what type of credit card you want based on your credit bureau, spending habits, and desired rewards, it's time to choose the best credit card for you.
To do that, I would take a purely quantitative approach. What it means to use mathematics.
The worst thing that can happen is having a card that doesn't reward you better for the kind of spending you normally do!
5. Request the best card for you
And the last step in choosing a credit card is to go out and apply for the best card for you.
The biggest caution with opening a new card is the temporary negative effect it will have on your credit score due to a hard credit check. What happens every time you apply for a new traditional credit card?
This is a one-time drop in your score that will be reversed over time with responsible spending and paying your card on time every month. However, it will happen and it is the reason why you should not apply for or open several credit cards in a short period of time or just before you have to take on debt (such as a mortgage).
Extra step: Pay your card on time every month!
Like beer commercials, all ads, articles, and credit card information must include the disclaimer, "use responsibly."
A credit card can be a great tool for consumers when used correctly and paid on time each month. So do that. Pay on time every month and don't spend money on things you can't afford!
Summary: How to choose a credit card
Learning how to choose a credit card is easy when you know what to do. And now you know.
Just remember to complete each step and not rush into a decision. If you have questions, reach out at any time.
