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Americans love credit cards.
According to data collected by Experian, the total number of active U.S. credit card accounts approached 500 million in 2020, growing roughly 2.5% from the year prior. This growth came in spite of an unusual (and heartening) 9% decline in credit card debt, the first drop of any size in eight years.
With approximately 1.5 credit cards for every person in the United States, and more like 2.5 for every American over age 18, it’s clear that many of us feel that we need more than one credit card. That means tackling the question of how best to choose the right credit card from multiple angles — because the right credit card for today might not be the right card for tomorrow, next month, or next year.
Choosing the right credit card for the moment is much easier once you know how you plan to use your new card. Specifically, do you plan to carry a balance from month to month or pay off your balance in full each statement cycle?
Factors to Consider If You Plan to Carry a Balance
To be clear, credit card interest gets expensive quickly, so it’s usually best to pay your balance in full each statement cycle. But there are limited circumstances in which it makes sense to carry an interest-bearing balance over time — albeit as little time as possible — and a much wider array of circumstances in which you’d want to carry an interest-free balance in the short- to medium-term.
If you do plan to carry a balance from one statement cycle to the next, the cost of doing so is paramount. You’ll need to consider each candidate card’s introductory interest promotion — its rate and length — plus the regular APR that applies once the introductory period ends, and the fees you could encounter in the course of paying down your balance.
Introductory APR Promotion
The low- or 0% APR introductory promotion is one of the most common enticements credit card issuers use to hook new cardholders. It’s also the most reliable way for new cardholders who plan to carry balances to reduce the cost of doing so.
The general rule for credit card applicants planning to carry balances on their new cards is: The longer the low- or no-interest period, the better. Look for credit cards with 0% APR periods lasting at least 15 months, and preferably even longer. The best low-interest credit cards and balance transfer credit cards have interest-free periods that stretch 18, 20, and even 24 months.
Carrying an interest-bearing credit card balance is rarely a good idea, but it’s not always possible to avoid. Costly medical emergencies, lengthy periods of unemployment, unexpected home or car repair costs not covered by insurance — these and other common situations often leave hefty credit card balances in their wake. This is especially true if you’ve already exhausted your options for finding financial assistance to help with your emergency.
If you’re currently dealing with the fallout from a balance-generating situation, you’re probably in the market for a balance transfer credit card. The ideal balance transfer card’s regular APR — the rate that kicks in after the low-or no-interest promotional period ends — is as low as possible. That way, if you’re not able to pay off the transfer in full before the promotion ends or you encounter future financial hardship that necessitates a new carried balance, the financial consequences aren’t as severe.
Likewise, if you’re worried that you’ll encounter balance-generating hardship in the future, keeping an “emergency” credit card in reserve isn’t a bad idea. This card’s regular APR should be as low as possible. Ideally, you shouldn’t use it at all unless an emergency arises.
Balance Transfer Fee
If you’re able to pay off your entire balance transfer period during the low- or no-interest promotion, the balance transfer fee is liable to be your new balance transfer card’s largest (and perhaps only) cost.
Balance transfer fees really add up. On a $3,000 transfer, the difference between a 3% fee ($90) and a 5% fee ($150) is $60 — not exactly pocket change. All else being equal, the ideal balance transfer card is the one with the lowest balance transfer fee.
Factors to Consider If You Plan to Pay Your Statements in Full
If you plan to pay your credit card balance in full each month, you’ll have the luxury of considering a wider range of factors, including some that could reduce the net cost of card spending: credit card rewards, new cardholder bonuses, travel and purchase credits, and intangible or difficult-to-value perks like airport lounge access and elite status with participating travel loyalty programs.
The catch: Credit cards with generous rewards programs, new cardholder bonuses, and travel perks tend to require applicants to have good or excellent credit and ample incomes.
If you consistently pay off your rewards credit card’s balance on time and in full, the net cost of your spending on that card should wind up lower than the total value of your purchases. For example, if you spend $10,000 this year with a credit card that earns 2% cash back on all spending, you’ll earn $200 in rewards and cut your net spending on that card to $9,800.
Maximizing your credit card rewards means choosing the right card for your spending patterns. To do that, you need to understand the main types of credit card rewards programs and compare how much you’re likely to save with each. If your long commute has you filling up your gas tank twice per week, your ideal credit card is one that produces an excellent return on gas station spending.
To be clear, more than one “ideal” rewards credit card exists for many if not most consumers. It’s common for credit card users to use multiple credit cards to maximize rewards on different types of spending: groceries, transportation, vacations, and general-purpose spending that doesn’t fit into neat categories. But there’s often one ideal credit card for each type of spending.
Sign-Up Bonus (New Cardholder Bonus)
The sign-up bonus, sometimes known as the early spend bonus or welcome offer, is another powerful enticement for new cardholders. And credit cards with generous sign-up bonuses also tend to have attractive rewards programs, so they’re worth keeping around after the bonus period — typically three to six months — ends.
The trick to choosing the right sign-up bonus is making sure you can handle the initial spend requirement. Although this could well mean accepting a smaller bonus than you’d like, a smaller bonus is better than no bonus at all. For example, if you typically spend $500 per month on credit cards and you have no major purchases planned for the coming quarter, you probably shouldn’t apply for a new cardholder offer that asks you to spend $5,000 in three months — no matter how attractive the bonus.
Likewise, make sure the type of spending required to earn the bonus is appropriate. Some co-branded airline and hotel cards condition new cardholder bonuses on spending with partner brands. If you don’t plan to fly or stay in a hotel during the bonus period, you might miss out on the opportunity.
Travel and Purchase Credits
Some premium credit cards offer generous credits against specific types of purchases or purchases with specific partner brands.
The most common credits involve travel: general travel credits that offset eligible travel purchases up to an annual allowance, typically $200 or $300; credits against security preclearance application fees; credits against purchases with specific travel merchants, such as airlines; and companion airfare certificates that cover the cost of a traveling companion’s ticket less taxes and fees.
Some cards offer nontravel credits as well. For example, the Platinum Card from American Express offers up to $200 in annual credits against eligible Uber purchases, while the Chase Sapphire Reserve Card offsets eligible DoorDash and Peloton purchases.
Other Intangible Perks
Make no mistake, “intangible” perks can be quite valuable for credit card users positioned to exploit them. Prime examples include:
- Airport Lounge Access. Some premium travel rewards credit cards like the Chase Sapphire Reserve® or The Platinum® Card from American Express offer complimentary membership in airport lounge loyalty programs, such as Priority Pass Select. These programs confer discounted or complimentary lounge access to the member and one or more ticketed companions. With full-freight airport lounge access typically running about $60 per person per entry, it doesn’t take long for this benefit to pay for itself.
- Elite Status. Many premium hotel, airline, and general travel cards offer complimentary elite status with major travel partners. These statuses are immensely valuable for frequent travelers, with typical benefits like complimentary room or fare upgrades where available, accelerated loyalty point earnings on eligible purchases, and guaranteed reservations with adequate notice.
- Travel Discounts and Perks. These benefits vary by card and card type but can include convenient perks like priority aircraft boarding and complimentary checked baggage, hotel discounts or freebies like resort credit and complimentary meals, and discounts or perks with third-party travel merchants like preferred rates or model upgrades on rental cars.
- Shopper and Traveler Benefits. These benefits are typically backed by the card issuer itself — Visa, Mastercard, or American Express, for example. They vary by card but often include compensation for returned purchases when the original merchant refuses to refund the sale price, complimentary rental car insurance, and complimentary cellphone insurance (less a token deductible).
Factors That Affect All Credit Card Users
Some factors affect all would-be credit card users, regardless of how they plan to pay for card purchases. These factors include fees such as annual fees or foreign transaction fees, card characteristics like credit requirements and credit limits, and logistical considerations like how widely the card is accepted.
Determining whether it’s worth it to pay an annual fee on a credit card comes down to one simple question: can you get more out of the card, financially speaking, than you put in?
The general rule of thumb is this: It’s worth paying an annual fee if you can reliably extract a greater total value from the sum of the credit card’s rewards program, any recurring bonuses or credits (such as travel credits), and any intangible benefits (such as airport lounge access).
It’s usually not worth paying an annual fee if you plan to carry an interest-bearing balance because the annual fee will only deepen the financial hole created by those interest charges. However, you might not have a choice in the matter if, say, the only balance transfer card you qualify for charges an annual fee.
In a temporary sense, your credit score really is your financial destiny. Every credit card subjects applicants to a battery of underwriting requirements and most include credit quality among them. If you don’t meet a particular card’s credit standards when you apply, you’re probably not going to be approved. Focus on building your credit and improving your credit score, and in the meantime, consider applying for a card designed for people with impaired or limited credit.
Many credit cards for credit-impaired or -limited consumers are secured. They require a security deposit as a condition of first use, usually in an amount equal to the approved credit limit. If you can’t afford to put down a security deposit right now, you might not be ready for a credit card at all. If you can, understand that you’ll only recover that deposit when you pay off your balance in full and close your account or — if approved — graduate to unsecured status.
Your approved credit limit is a function of your perceived ability to repay, which is in turn a function of your creditworthiness, income and debt-to-income ratio, and existing credit utilization ratio. However, two credit card issuers can and often do come to different conclusions about the same applicant, especially one with less-than-perfect credit. Some credit cards for applicants with limited or impaired credit cap limits at $1,500 or less, even for comparatively well-qualified candidates, while others keep the tap open until $5,000 or even $10,000.
Foreign Transaction Fee
Many credit cards tack surcharges onto transactions processed outside the United States. Known as foreign transaction fees, these charges apply not just to international in-person purchases — the sort you’d make on an international vacation — but also on purchases made with non-U.S. merchants that process payment outside the United States, regardless of where the transaction originates.
Yes, that includes some online shopping purchases.
The easiest way to avoid foreign transaction fees is to rule out credit cards that charge foreign transaction fees. That way, you never have to wonder whether you’ll incur a surcharge on a purchase routed through a non-U.S. payment network.
Visa and Mastercard remain the most widely accepted credit card networks in North America and Europe. Although they’ve made considerable strides internationally since the 2000s, American Express and Discover remain laggards. This is an important consideration for frequent international travelers and may well serve as a tiebreaker for people choosing between otherwise comparable Visa or Mastercard and American Express or Discover products.
Choosing a credit card that’s right for you means weighing any number of the factors on this list — perhaps all of them. It’s enough to make your head spin.
Fortunately, choosing a credit card isn’t a life-or-death decision, even if the mere act of applying for one can temporarily ding your credit score. If you choose a credit card that turns out not to be a great fit for your lifestyle or spending plans, you can always pay off its balance, let it gather dust in a secure location somewhere, and apply for another credit card that suits you better.
As long as you keep your overall credit utilization low — or work to reduce it if it’s temporarily elevated — and avoid carrying high-interest balances whenever possible, the benefits of responsible credit card use outweigh the drawbacks.
Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author’s alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.