Choosing a Credit Card (What to look for and how to decide!)
A few days ago, over on instagram, I asked you “What I should make a video on next?”
One of my favourite responses was ‘What should I look for when getting a credit card?’ and I think it’s a GREAT Question! So if you’re looking to get a credit card, and wondering what factors you should be looking for and how to make a decision that best fits your needs: this post is for you!
If you’ve been looking into getting a credit card, you may be thinking:
What do I even need to consider?
What questions should I be asking?
What types of features should I look for, and which ones should I stay away from?
OR, maybe you’re like I was a few years ago and thinking, wait, there’s a difference between credit cards and THERE ARE DIFFERENT TYPES???
Well let me be the first to tell you, yes. Yes there are!
Today, I’m going to go back in the brain archives to pull out all the information and research I did when I was totally confused about this so YOU don’t have to be.
Let’s start by discussing the different types of Credit Cards:
Standard Credit Card:
The first, and most popular, is the standard credit card (AKA ‘Unsecured Card’). This is the most common card, and what you typically think of when you think of a Credit Card. Basically, if you’re approved for one of these, you will get a credit limit to spend within, and charged an interest rate for money that you owe on the card.
These cards can have a lot of differences including how that interest rate is calculated, when you have to pay it by, and what rewards you get by spending on that card. But, we’ll talk about all of these details later. For now, just know that it’s a type of card that’s available.
Secured Credit Card:
The second type is a Secured Credit Card. These require ‘collateral’ for approval. For people with little, or no credit, it’s a great place to start. (Or, if you have terrible credit, need to rebuild from scratch and can’t get approved for any standard cards, this is a good route to take!) With this card type, you pay a certain amount of money in advance, say, $500, and they give you a card with that amount limit. (Generally, the money you pre-pay is equal to the limit on the card)
After a few months of using this card, (and consistently paying it off - on time) you’ll be ready to move up to a standard card instead.
Prepaid Credit Cards:
The third type of credit card isn’t reeeally a credit card, but I want to mention it here anyway because it seems like it is and can get a little confusing.
Prepaid Credit Cards.
These are like those pre-loaded Visa or MasterCards you get from your uncle on your birthday. It’s not a real credit card. But it essentially acts the same way. You can use it online or at a store just like you would a regular credit card. BUT the amount is already pre-paid on to it. It’s like, a gift card, but for every store that accepts major credit cards. I mention the gifts, because that’s the only thing I’ve ever used these as, but, if you’re looking to make an online purchase, and for some reason don’t want to use a credit card (maybe if you’re paying off debt for example) or you don’t have one of those debit cards that can also be used online, you can preload one of these to make the purchase.
For the purposes of today’s post, I’m going to assume that you are looking into getting a regular, standard credit card.
So, what do you need to consider?
Things to Consider:
To understand which factors are going to be the most important for you in your credit card, you have to first take a look at WHY you’re getting the card.
Are you getting it to build your credit? Then it’s probably a high priority to look for something with no fees attached because you’re going to be keeping it open for a long time.
Are you getting it as your every-day purchase ‘go-to’ card? Then rewards are going to be important to you because you’ll take full advantage of them. Think about what the card is going to be used for, and HOW you’re going to be using it.
If you’re planning on travelling with it, you’re going to have to take a look at the fees on Foreign Transactions, or if there are any perks like complimentary travel insurance or VIP lounge access.
The ‘WHY’ of your card is going to determine how each of the factors I’m going to talk about will be prioritized in your research.
Factor 1: Annual Fees
Factor Number 1 is Annual Fees. There are a TON of cards out there that do NOT have an annual fee attached to it. Look for these first, because it pains me to think of banks collecting money from us just for the privilege of using their branded piece of plastic. HOWEVER, in certain situations the fees can outweigh the benefits of the card and THAT’S when having an annual fee is acceptable.
Do your research and calculations on this. If you have it, take a snapshot of your previous spending and figure out whether the fee would have been worth it for you. Or, do a future projection to see just how much you will have to spend in order for it to equal out. In many cases, it won’t, and that’s how they getchya!
So be careful with annual fees, and make sure to read the fine print BEFORE you get the card to know if you’re being charged one!
Sidenote: If this is your first credit card, DON’T get one with an Annual Fee! You’re going to want to keep that FIRST card open for a long time as a representation of your credit history. You DO NOT want to be paying that fee for the rest of your life!
Factor #2: Interest Rate
THIS is the one you’ve all been waiting to hear about: Interest Rates. And you know what? I’m going to say don’t pay too much attention to it. WHAAAT?! But the interest rate is the single most important factor in how much extra I’ll be paying my credit card company once I get the card!! If you’re using your credit card properly, you won’t be paying any interest.
Let me explain: the proper, and healthy way to use a credit card is to never charge anything to it that you don’t already have money for in your bank account. Yep, paying it off, IN FULL every. single. month. If you’re not ready to do this, you’re not ready for a credit card. That being said, obviously, interest rate IS an important factor in choosing a card
Sometimes, life happens, we fall off the wagon, whatever. So, if there’s an option to get a cheaper interest rate, go for it! But when your initially searching, just try and at least make sure you’re matching the average interest rates.
For Canada, that average interest rate is around 19% For the US, it’s around 14%.
If you’re getting a card for the very first time, you’re interest rate is probably going to be higher than that. They don’t know you, and there’s nothing showing them that they can trust you with paying back the money. But if you’ve been using credit for a while, you’ll be able to negotiate a really great interest rate.
Especially if you have a good responsible credit history!
Factor #3: Credit Limit
Factor number 3 is Credit Limit. Again, if you’re getting a card for the first time, or, it’s your first time with this specific bank or lending agency, your limit might be small. That’s ok, if you’re just building your credit you don’t actually need a high limit on your card. But if you’re looking to use it to make a big purchase, THEN the limit might matter a little more to you.
In my experience, the best way to get a high credit limit is to be consistent. Start off with a really great base card, and pay it consistently. In time, that bank or lending agency will see that and offer you pre-approved increases. You don’t have to do anything extra, you don’t have to worry about it, but that limit will be there when you need it.
You can also request increases earlier if you want them, but again, you’ll have to start off with a smaller one to prove you can really be responsible before they’ll approve you for increases. If you’re confused about this, or wondering if these increases will effect your credit negatively please check out my ‘What is a Good Credit Score in Canada’ post.
In that post, I went over all the effects that these types of moves have on your credit score and explain why it’s actually a good thing to say yes to those free increases! (Even though they seem kind of scammy)
Factor #4: Fees & Penalties
Factor Number 4 is Fees and Penalties.
READ THE FINE PRINT.
I know, none of you will actually do this, because who reads the terms and conditions on anything, but this isn’t your Pokemon Go update.
THIS IS YOUR REAL LIFE.
So read BEFORE you sign. THIS is the single most important piece of advice I’m going to give you. In order to choose a credit card that’s going to be right for you, you have to KNOW all of the sneaky little things that bank is trying to pull under your nose.
Is there an annual fee on the card?
NO, it doesn’t matter if that fee is waived for the first year, you still need to know if there’s a fee because it’s an ongoing cost you’ll have to incur in the future.
What are the fees on foreign transactions?
I don’t know about you, but sometimes, I buy things in different countries.
Did you know there’s often a fee for this?! I didn’t! But guess what, using your credit card to do that will generally cost you an extra 2-4% of the purchase. On top of any potential exchange rates or customs fees, that can make shopping across the world pretty darned expensive.
If you’re going to use your card for this, make sure you’re looking for a LOW fee. (FYI, In Canada, the average fee is 2.5%, in the states it’s 3% but there are a few cards in both countries with a 0% fee so look for those ones!)
What’s the fee for a late payment?
Hopefully you’ll never have to incur this cost, but if something crazy ever happens, you still have to KNOW what this fee actually IS. If you are ever late in paying your minimum payment, this is the extra charge that the company is going to tack on to your bill. They might also increase your interest rate after a late payment so make sure you know what’s up before you miss one of your payments and get screwed over.
There can also be other fees like an ‘exceeding your credit limit’ fee, an ‘inactive account fee’ or a ‘cash advance fee’. The only way you’re going to know if a card you’re looking into has any (or all) of these, is by reading those tiny little charts they stick in the bottom corners of credit card marketing pages.
It’s going to take some commitment, but understanding all of those little fees can really make a difference in choosing which card is right for you.
Factor #5: Rewards (Sign-up Bonuses)
Factor Number 5 is rewards and sign up bonuses.
Yes, I’ve left this specifically to the end because I know you wanted me to talk about it first.
Credit Card rewards can be AMAZING. I’m all for sticking it to the big companies and getting all the extra perks you can out of them. But, these companies know that’s what you’re in for. That’s why they make these reward programs confusing and filled with tiny little details that again, NO ONE READS.
Here’s my tip for you: Don’t let the temptation of a good deal or an amazing perk cloud your judgement when it comes to choosing your credit card.
Think about HOW you’re actually going to use that card, AND HOW you live your life. Say there’s a card, it’s got an annual fee, but it’s got a GREAT travel rewards program. There’s also a signing bonus that waives that annual fee AND a 0% interest rate offer for the first 6 months.
Sounds great right?
BUT, once you look into it, you figure you have to travel at LEAST 4 times in the next year to make it worth it, and you have to spend a ridiculous amount on the card in order to qualify for enough rewards to make those 4 trips valuable.
You’re paying off the card every month, so the 0% interest rate doesn’t even matter to you anyway.
IS that worth it?
If you’re already planning on travelling 3-4 times, yea, it might be. But what about the next year? Will it be worth it then? Or are you going to have to cancel the card? Can you take that hit on your credit score next year, or are you thinking of needing it soon?
If you’re NOT already travelling 4 times a year, maybe it’s not worth it, and a cashback card would be better. You wouldn’t get travel miles, but the cash you do get can be used for travelling if you need it. What about a card that offers cashback in specific categories? Do the categories rotate or change? Can YOU choose the categories you get cashback in or are they chosen for you? How many times can you change those categories?
Trying to ‘game the system’ when it comes to your credit cards is fine. A lot of people use credit cards in this way, signing up and cancelling cards left and right in order to get these types of bonuses and perks when they need them. It CAN save you a lot of money. But it’s also exhausting. There’s a LOT of work involved in this, especially to do it right.
You have to keep track of all these little perk conditions, closing dates and opening dates, when to use which card at which time, UGH. Don’t commit to that. It doesn’t hurt to make sure there’s a rewards system associated with your card. But you also don’t have to put pressure on yourself to figure out the SINGLE BEST REWARD THAT WILL CHANGE YOUR LIFE.
My Advice? When in doubt, just choose cashback.
Pick a well rounded card, with rewards you’ll actually use. An interest rate that’s easy to swallow, and conditions you actually UNDERSTAND.
If you want to know more about credit cards and credit scores, you can check out my ‘What is a Good Credit Score in Canada’ post, or ‘How to Find Out Your Credit Score’ post
Let me know in the comments down below what your favourite credit card is and have you ever had a super terrible experience with a credit card company? I’d love to hear the story!