By the time you reach 25, it's likely you've gotten a few credit card offers in the mail. Whether you choose to sign up or throw them in the trash usually depends on how much you know about the offer. Paying attention to the terms of each offer is important before getting yourself into an agreement with specific lenders, and finding out which card is right for you can save you a world of headache down the road.
Even if you don’t plan on racking up a balance and taking months to pay it off, it’s always important to pay attention to the interest rate or APR.
While the Credit Card Accountability Act of 2009 put a restriction on penalties and fees that credit card issuers can charge, it didn't fix the problem of high interest rates. In 2010, one card was found to be charging 79.9% interest! Others charge as little as 0% if you’re considered credit worthy, but usually only for an introductory period. Obviously the lower the rate, the better off you’ll be if you’re financial situation changes and you’re forced to carry a balance.
(This article offers a list of some of the best low interest credit cards: How to Choose Your Best Credit Card for 2013.)
If you plan on using your credit card to accumulate airline miles or get cash back, you might be using it a lot like cash, which means you'll need a higher credit limit to keep yourself from going over. On the contrary, if you're not exactly great at safely spending high amounts of money, it's best to go for a low limit credit card for limited purchases like gas and groceries.
There are a few ways that issuers determine what your credit limit will be:
- Your credit score
- The type of card you are approved for (i.e. a certain card comes with a pre-determined limit)
- By using a variable based equation that could take into account past bankruptcies, limits on your other open cards, etc.
Once you have a clear-cut answer as to what limit you’re being offered, take into account your current financial situation and what you’ll be using the card for. Then go from there.
If rewards are your thing (who doesn’t like a reward for spending money?), then you’ll obviously want to find the cards offering the rewards you would use for the purchases you are already making.
I personally like cash back cards so that I can be selective about what I spend my money on, but if you’re a frequent flier, then getting a card that earns miles might be a huge benefit.
Some cash back cards offer a certain percentage back on purchase categories that change monthly, while others pay a flat percentage rate on all purchases all the time.
There really isn’t a one-size-fits-all answer when it comes to credit card rewards, although some certainly offer better benefits for what you’re looking for. Decide what you would want, and then do your research on sites like Card Hub.
Cost, Fees, and Penalties
A credit card’s annual cost, fees, and penalties can affect every other point we’ve talked about – annual cost and fees can take a bite out of rewards and penalties can stall upward movement of your credit limit, and jack up your interest rate.
Since the Credit CARD Act limited the amount of fees that issuers can charge, many began tacking on annual fees to make up the difference. If that annual fee is tacked on to a card with huge rewards, then it might be worth it. But some cards don’t offer much of anything for that annual fee. (Remember the credit card with the 79.9% interest rate? They charge a one-time $75 for the first year and $45 for every year after for an initial credit limit of $300.)
Pay attention to the fine print on any credit card offer – that’s likely where you’ll find a breakdown of things like cash advance fees, grace periods, transfer fees, etc.
The Bottom Line
Determine how you want your credit card to work for you, then do your research to find a credit card that will do just that. Sites like Credit Karma might even do the leg work for you with a breakdown of the best credit cards based on the quality of your credit score.