Using a credit card can be a great way to boost your credit score, earn rewards points and get cool perks. But, choosing the wrong credit card could leave you with rewards you don't use, high fees and sky-high interest rates.
At least one in five credit card holders are using the wrong credit card, a J.D. Power study revealed. "Keeping the wrong credit card at the top of your wallet is like being in a bad relationship: You’re stuck giving more than you get, making the most of the terrible terms and defending your choices to your family and friends," as NerdWallet explains.
If you're signing up for your first card or looking to upgrade to a better card for your needs, ask these five questions about any credit offer you're looking at.
1. What do I have to pay each year to put your card in my wallet?
American Express has an invitation-only credit card with a $7,500 initiation fee and a $2,500 annual fee. The Black Card, or Centurion Card, is a "status symbol," according to Travel + Leisure — but it is one many millennials are rejecting. Savvy millennials are looking for cards offering more bang for their buck.
This means assessing whether annual fees are worth it at all. There are great no-fee options, like Citi Double Cash, offering 2% cash back on purchases, or Capital One Quicksilver Cash Rewards, with 1.5% cash back.
Paying annual fees is smart if you earn enough rewards to exceed the fees, use perks the card provides or get free services you'd otherwise pay for. "If you need to purchase primary auto rental coverage each time you get a rental car, it might be wise to get a rewards card that offers that coverage as a cardholder perk instead," the Simple Dollar explained.
So before you dismiss fee cards out of hand, estimate how much you'd need to spend for the rewards to surpass the fee. Or, ask the creditor to waive the fee — surprisingly many consumers are successful when requesting a fee waiver.
2. How will you reward me for spending with your card?
No-frill cards without rewards points actually still exist, but why anyone would want one is a mystery. "Every time you use your credit card, the merchant pays a fee (called interchange), most of which goes to your bank," Forbes explained. "Your goal should be to get as much of that interchange back as possible." You should be rewarded somehow for using a card, whether that reward is cash, gifts cards, free flights or an all-expenses paid trip to Rock 'n' Roll Fantasy Camp.
When shopping for a card, find out how many points you earn for purchases, what each point is worth and what you can redeem your points for. Capital One VentureOne offers 1.25 miles per dollar spent, for example, while Chase Sapphire Reserve gives you three points per dollar spent, which equates to around a 6.3% return if you do the math.
Also, make sure to look for rewards you'll use, as almost a third of credit card holders don't redeem points. You could miss out on really cool stuff by not using your rewards. "For my husband’s 40th birthday we took an around-the-world trip. We flew business class to Amsterdam, Singapore and the Maldives, where we stayed in a private villa. The trip would have cost tens of thousands of dollars. In total, our award tickets cost 240,000 United miles, plus around $200,” Summer Hull told Travel + Leisure.
3. What about other cool perks?
Speaking of travel, if you're going to be taking some Instagram-worthy trips, find out what a card charges for foreign transaction fees. Most cards have a fee charge around 3%, so if you'll be crossing borders, look for a card that's not going to charge extra if you pay in Pesos or Euros.
"Cards without foreign transaction fees are widely available in a highly competitive market as banks fight to attract and keep customers," Nessa Feddis, vice president and senior counsel for the American Bankers Association told CreditCards.com. Capital One Quicksilver World Elite Mastercard and BankAmericard Travel Rewards Visa Signature Card are a couple examples.
If you're not a jet-setter, you can still find a card that offers you cool perks. If $200 in free Uber rides sounds sweet, an American Express Platinum card has you covered. Love music, movies or sports? Citi Private Pass will help you score pre-sale packages for concerts, sporting events and screenings.
With so many cards offering similar deals on rewards points, it's the perks that can differentiate one card from another. "While most credit cards offer some kind of cash-back or points program these days, travel cards can pay for themselves in spades with some of the perks and benefits they afford," Thrillist explains.
Narrow down your list to one or two cards offering generous rewards, then ask for a complete list of perks to pick the card with the coolest offerings.
4. Any introductory offers to reward me for choosing the card?
"Right now, it’s a really good time to be a customer, especially one with good credit. The issuers are really going after each other with lucrative deals," Matthew Goldman, the chief product officer for the credit card sites at Bankrate, told the New York Times.
"What's great about signup bonuses is that you can earn a generous amount of rewards by spending only a fraction of the amount you'd ordinarily need to spend to earn the same amount of rewards," the Balance explains. Just make sure you actually spend enough to earn the bonus, which usually only pays out after you hit a minimum spending threshold in a designated time.
5. What interest rate are you going to charge me?
This could be the most important factor — or the least important — depending on whether you carry a balance.
"If you carry a balance, then choosing the best credit card rates is the way to go," the Balance explains. "Common sense would point to the fact that accumulating rewards or mileage points while paying compounding high interest over the span of years will end up costing you much more than the price of an airline ticket or a non-discounted gallon of gas."
If you are in credit card debt already, one of your best options may be a credit card with a 0% balance transfer offer — like the Citi® Diamond Preferred® Card offering 0% interest for 21 months with a 3% fee to transfer your balance — so you can consolidate your debts onto one card which won't charge you monthly.
If you always carry a balance and just want the low rate and no annual fee, consider a card like the Barclaycard Ring Mastercard, which has a 13.74% annual percentage rate after the 0% interest introductory period ends.
But, if you pay off your card every month, interest doesn't matter much and you can shop for a card based on fun stuff, like the cool rewards you'll claim.
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