Credit cards can be a great tool for improving your finances. Knowing how to choose a credit card will set you up for financial success for years to come.
Table of Contents:
4 rules for choosing a credit card:
With all the cards out there, how do we pick the right one? We recommend four simple steps.
1: Get the Best Card You Can With Your Credit Score
You credit score determines whether or not you have access to the nicer credit cards.
Even if you’re just starting out or had some bad luck along the way, don’t be disheartened if you get declined by the nicer cards. As long as you begin paying off your cards every month and stay current on all your debts, getting a high enough credit score for the top-tier cards is definitely feasible.
Whatever card you need to start with, use it for a few years and build up a solid credit history. Then try applying for a slightly nicer card and do it again. After a decade or so, you should be able to get any card you want.
2. Decide on Simplicity vs Maximization
Let’s assume you have a good enough credit score to get just about any card you want.
You’ll need to decide which is more important to you: simplicity or maximizing the value of rewards.
If you want simplicity, get a cash back card. You’ll get a straightforward percentage back on every purchase you make and there’s nothing you need to manage or remember. Super simple.
Now if you want to maximize the value of your rewards, you’ll want to get a travel rewards card. These give you points for every purchase that you can redeem for airline tickets, hotel nights, and some retailers. Every point system is a bit different and redeeming points is always more complicated than getting a basic cash back. But for the extra trouble, you will get more value from them.
The one exception to all this if you don’t enjoy traveling. Travel rewards cards focus on people that travel. So if you don’t travel at all, stick to cash back card.
3. Factor in the Number of Cards You Already Have
When you’re working on building your credit, I recommend having one card. Only get new cards once you’re credit has improved and you’re ready to upgrade to a better card.
At the point where your credit score is good enough to get a good rewards card, start with one general rewards card that you’ll use for everything. Pick a cash back card that has an above average cash back percentage across all purchases. Or a travel rewards card with a good points program and a few nice perks. Don’t over-complicate it at this stage.
Once that feels comfortable, feel free to expand to 2-3 cards. There are a few reasons to do this:
- Maximize reward across spending categories. You might put gas spending on one card and travel on another in order to get bonus points on different cards.
- Add perks. Airline cards have great perks, so do hotel cards. If you travel a lot, take a close look at these.
- Flexibility with points transfers. Each point program has a different set of partners that you can transfer points to. If you wanted complete flexibility on being able to book airlines rewards for example, having a Chase and an American Express card maximizes your partner coverage so you can book the exact airline or hotel that you want.
I still recommend keeping things simple even as you consider having multiple rewards cards. Rotating points categories, point hacking games, and cycling through card signup bonuses are more trouble than they’re worth.
If You’re a Business Owner, Repeat
Lastly, if you own a business, you’ll want to repeat this process for your business credit cards.
Even a side hustle or hobby business should keep business and personal transactions separate. That makes taxes and expense tracking a lot easier. And since you should separate everything anyway, why not run all your business transactions through a business credit card and get a bunch of rewards along the way?
Same general rules apply as personal cards. First, decide if you want rewards maximization or simplicity. Cash back cards are best for simplicity, travel cards are better for maximization. Second, start with one general rewards card that can cover the majority of your spending. Then consider additional cards if you really want certain perks or want to maximize rewards value even more.
How to choose between different types of cards:
The first credit card was simple. Banks provided a card with a line of credit. You charged it, then paid it off. That was it.
Today, things have gotten a bit more complicated. There’s travel cards, student cards, charge cards, business cards, and on and on.
Which type of card is right for you? What are the pros and cons between them all?
We broke it all down below so you can choose a credit card that’s perfect for you.
Cash Back Cards
A cash back credit card gives you back a percentage of everything you spend.
Cardholders typically receive between 0.5% and 2% of net spending as an annual rebate. Most folks use it to pay down future spending on their card. Some cards also let you get the rebate as cash.
It’s like getting a permanent discount on everything you purchase with that card. Since most cash back cards don’t have annual fees, it’s free money.
PRO: Cash back cards are super simple. You don’t have to do anything to get your cash back. The rebate shows up automatically. For a rewards card, it’s as simple as it gets.
CON: Don’t ever use the cash back as an incentive to purchase more than you usually would. If you carry any interest on the card, you’ll lose more money than you’ll ever get in cash back. Also watch the foreign transaction fees, many cash back cards have them.
Travel Rewards Cards
This is the other main type of rewards credit card.
Travel rewards cards follow the same concept as the cashback cards, except users accrue points or miles instead of money. These points can be redeemed for flights, hotel rooms, Amazon purchases, or even cash in some cases.
Some of them also come with great perks like airport lounge access, free nights, companion fares, travel credits, and Uber credits.
PRO: If you enjoy traveling and want to maximize the value of your rewards, get a travel card. You’ll get a better return than a standard cash back card.
CON: Most travel credit cards include an annual fee to gain access to all the perks. These fees range anywhere from $100 for mid-tier cards to $600 for the top-tier travel rewards cards. You’ll also have to put more effort into spending your miles/points. Finding the right flights and hotels can take some work if you’re trying to maximize their value.
Balance Transfer Cards
This type of credit card allows the user to transfer a balance from one credit card to another.
The new credit card company usually offers a promotional or introductory period – usually, six months to 18 months – with zero percent interest is charged on the transferred amount. They’re hoping that you forget about the balance, increase spending, then start paying them interest once this period is over.
PRO: If you carry a balance, these cards can give you some relief for a short period. When cash is really tight, they’re an option.
CON: Credit cards are a pretty terrible deal if you carry a balance. The interest rates are crazy high. Balance transfer might help in the short term but they’re not a real solution. Your real goal should be to get yourself to the point where you can pay all your credit cards off in full every month. That’s when credit cards start working for you.
Premium Credit Cards
Premium credit cards, often referred to as black cards, charge an annual fee but offer cardholders lots of exclusive benefits.
Often viewed as a symbol of status, premium cards offer a high credit limit and several perks that are difficult, or expensive, to find elsewhere.
PRO: A popular benefit of premium credit cards is 24-hour concierge assistance with tasks like booking travel reservations, hotels, flights, as well as activities like show tickets, restaurant reservations, home emergency coverage, car breakdown issues, and more.
CON: Premium credit cards are aimed at consumers with excellent credit and people who fall in a specific earnings bracket. For these reasons, many users don’t qualify for these types of credit cards.
For those users with incredible credit and earning a healthy wage, premium cards come with fantastic perks but substantial annual fees typically starting at $500.
Business Credit Cards
Business credit cards are intended for business owners, no matter the size of the organization. They’re an option if you generate any side income.
They usually have a few perks designed for businesses.
PRO: Cash back categories and perks for businesses. You also don’t need an actual business, you can get one in your name if you generate any income yourself.
CON: Getting a business credit card can be a bit more complicated than a personal card. You might also have to agree to a personal guarantee. That means if the business can’t make payments, your personal funds would have to be used to pay off the card. Depending on the size of the credit limit and your business, this could be an enormous commitment.
Student Credit Cards
Student credit cards are marketed primarily to people in school who have not yet had a credit card in their own name.
Student credit cards are a great way to solve the “can’t get credit cards without having a credit history” problem that everyone starts out with.
PRO: The requirements are less stringent, you’re much more likely to get approved.
CON: They typically don’t have any rewards or perks. It’s a no-frills card.
The “Plain Vanilla” Credit Card
The standard or “plain vanilla” credit card is exactly what it sounds like. There’s no cashback, no fees, no rewards for usage, and no real benefits besides an extended line of credit.
PRO: These standard credit cards typically get a lower APR than other cards. They’re also typically easier to obtain and come in handy as an “in case of emergency” payment option. If you can’t get approved for a rewards card yet, it’s good to start here and build up your credit history.
CON: There are no perks for spending. In other words, the cards work like a debit card as long as you pay them off in full every month.
Gasoline Credit Cards
These cards offer bonuses and perks for people who frequent a gas station. Many of them are connected to a single gas station brand like Shell.
PRO: A good way to maximize rewards if you spend a lot of money on gas.
CON: Most gasoline cards target specific brands of gas stations, limiting their rewards on longer drives. It’s better to find a cash back card that gives a larger cash back percentage for the entire gasoline spending category.
Retailer Credit Cards
Cards provided by particular companies like Macy’s, Walmart, Target, and more. They typically give store-based perks that you won’t be able to find anywhere else. For example, the Nordstrom card helps get you early access to the annual Nordstrom Anniversary Sale.
PRO: Exclusive perks and rewards for one of your favorite stores.
CON: Unless you spend an exorbitant amount of money at a single retailer, you’ll almost always be better off getting a standard rewards card to use across all retailers. Some of them are also “closed loop” which means you can’t use that card outside the retailer. The fees can also be much higher than typical credit cards.
Airline Credit Cards
Airline credit cards can be great if you are a frequent flyer. Nearly every airline out there offers multiple credit cards. The higher the annual fee, the more perks you get while flying with that airline. Perks include priority boarding, free checked bags, discounts on in-flight purchases, companion fares, and lounge access.
PRO: Perks and extra miles when flying with that airline. If you fly regularly, I consider these perks to be essential.
CON: Some of the best perks like extra miles and lounge access require you to purchase the ticket on that card. They all have annual fees too. So if you fly many different airlines like I do, trying to get credit cards for all them will add up.
Hotel Credit Cards
The major hotel chains (Hilton, Marriott, and Hyatt, and IHG) offer multiple credit cards. The standard perks can be great like getting a 5th night free when booking.
But the real perks come from the loyalty status they help you achieve. Having a card can get you 10-15 nights credited to your status every year. Once you unlock the higher status tiers, you can get amazing benefits like room upgrades, free gifts, and late checkout.
PRO: Makes getting status with the major hotel chains a lot easier, unlocking some incredible perks. You’ll also rack up a ton of hotel points when spending at the hotel.
CON: To get the most of these cards, you really need to pick a single hotel chain and stick with it. If you prefer to try new hotels like I do, the value is much more limited.
The Ultimate Question: Travel Perks or Cash Back?
Generally, there are two kinds of rewards credit cards offer: travel points or cash back. But which one should you choose?
If you want to get every dollar in rewards possible, travel rewards programs always beat cash back cards. For credit card companies, there’s always a percentage of people who forget to spend their points, so they’re able to increase the value of their points over a more straightforward cash back program.
Of course, don’t get a travel points card if you hate to travel. That would be … unhelpful. It’s still worth it as long as you travel once per year.
Maximizing the value of your rewards does come with an extra cost though. You’ll have to manage your points. They’ll accrue in your credit card account and you’ll have to make choices on when and where to spend them. For example, different redemption methods have different values. The American Express Membership Rewards points are worth $0.07 on Amazon and $0.10 on Uber. Every card has its own redemption methods with its own values.
You could use the rule of thumb of always redeeming your points for miles on an airline program. This is a good rule, and it’ll usually maximize the value of your points. But you still have to transfer your points to miles. Each credit card points program will transfer to some airline programs and not others. And once you get your points into the right miles program, you’ll have to deal with whatever points restrictions your airline has (blackout dates, only certain flights being available, etc.). To add even more complexity, some credit card programs allow you to book flights and hotels directly through them, but then there’s a separate set of restrictions and point values that you have to deal with.
Sounds like a pain? It is.
For me, the extra hassle is worth the free international flights that I’ve been able to get.
If the extra hassle of a travel rewards programs sounds exhausting, get a cash back rewards card instead.
Cash back cards still have plenty of benefit without any work:
- You get a straight percentage back on all charges to your card.
- The cash back shows up on your statements either automatically or with very little effort. Worst case, you’ll have to log in and hit a button to initiate the cash back.
- While some cash back cards have maximum payouts, rotating categories, and other nonsense, there’s plenty of cards that keep things ultra simple.
That’s as simple as it’s going to get.
Here’s how to make your decision:
- To maximize the value of your points, get a travel rewards card.
- To maximize simplicity, get a cash back card.
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