This week’s Money Monday post comes from Tim Chen, CEO and Founder of NerdWallet.com.
We all want a credit card that pays 5% rewards on all purchases and has a concierge that will get us concert tickets and last-minute dinner reservations. We also want a card with no annual fee, no spending limit, and 0% interest for eternity. Unfortunately these cards don’t exist. Every one of the 1,200 or so credit cards in America has its own set of features, and its own set of corresponding trade-offs. So to understand these cards and truly know which is right for you, you have to understand yourself.
Are you a revolver or a transactor?
re·volv·er – A credit card customer who carries a balance month-to-month, taking advantage of the revolving credit line.
If this describees you, then your main focus should be interest rates and fees, and trying to keep both as low as possible. A no annual fee credit card is your best bet, and the lower you can get your APR, the better. This probably means passing up on rewards too, because rewards cards often carry higher rates and fees, which would cancel out any benefit you would receive from the rewards.
If you have other debt, like balances on other cards, that you want to consolidate onto your new card, then you should be on the lookout for 0% balance transfer offers. These will often allow you to get by interest-free for 6-12 months, but be careful about the new ongoing rate that will kick in after the intro period. Unless you plan on paying off all the debt within the intro period (Be honest!), you need to do some math and figure out what your effective interest rate will be over a longer time period. Also keep in mind that many of these cards charge 3% or more of the balance as an upfront fee, so make sure you’re really going to save money doing this.
If you won’t be transferring any balances, then you should only care about the purchase APR that will be applied toward your spending. Similar to balance transfers, many cards offer introductory periods of 6-12 months with no interest on purchases. Also similar to balance transfers, these cards can screw you after the intro period if you’re not careful about the new rate. So again, do a little math and determine what the effective interest rate will be over a couple of years, rather than just looking at the intro period.
trans·ac’tor– A credit card customer who pays off his/her bill every month and uses the card primarily for transaction convenience.
As a transactor, your main focus should be keeping fees low and keeping rewards high. It’s not quite as important to find a $0 annual fee, because you may be able to get juicier rewards that will make up for it, but make sure you take these fees into account when figuring out what your total reward bounty is going to be. And when deciding which rewards card is right for you, there are three main features you should be aware of.
First is the intro bonus. Much like low interest credit cards offer introductory APRs, rewards cards often offer upfront mile or points bonuses. A lot of times these bonuses alone will more than make up for any annual fees, and could even score you a free flight (Check out this crazy 75,000 AAdvantage mile deal from Citibank!). Just make sure that you aren’t getting a below-average reward rate in exchange.
The second main feature is the base rewards rate. One percent, or 1-point-per-dollar spent, is the industry standard, but the best cards in this category actually pay a no-BS 2% flat on everything. Be aware that some cards require you to meet a spending minimum before you hit the full base rate, however, so they’ll say things like, “Earn 0.25% on the first $3,000 per year and then 1% after”. In this case, your base rate is actually lower than 1%, depending on how much you spend each year.
And finally, the real kicker is the bonus rewards on categories like gas, dining, travel, groceries and drugstores. There is a huge number of potential bonus categories, and these cards often pay up to 5% in these categories. So align your chosen card with your own spending habits (i.e. don’t try to find the best gas card if you don’t own a car.) Just watch out for trapdoors - these bonuses are often capped, and they generally don’t reward warehouse store purchases like Costco and Sam’s Club.
Happy Hunting!
