How to choose a credit card

Mar 27, 2020

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The promise of earning valuable perks from a credit card can be exciting. But choosing the best card to add to your wallet isn’t always as easy as it seems. There are many factors to weigh before you fill out an actual application. At the very least, you need to consider your spending habits, the types of rewards you value the most, and the kind of credit card you’re likely to qualify for at this time. Here’s everything you need to know about how to choose a credit card.

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Review your credit

Step one to choosing the right credit card is checking your credit report from Equifax, TransUnion, and Experian. When you apply for a credit card, the condition of your credit will have a huge influence over whether you get approved or not. You can check all three of your credit reports for free once every 12 months at AnnualCreditReport.com.

Be sure to go through each report in detail. Get a sense of how your credit shapes up — good, bad, or otherwise. It’s also wise to check for errors and report them. Credit errors do happen and they could lower your credit scores in an unfair way. If you discover errors, you can dispute them with the credit bureaus. The Consumer Financial Protection Bureau provides sample dispute letters that may help.

You can check your credit scores as well, even though the scores you find online will likely be different from the score your lender sees. Credit card issuers have different minimum credit score requirements for different cards. So, if you find that your credit score currently falls in the “fair” range, it’s probably not wise to apply for a premium rewards card that requires excellent or good credit to qualify.

Related Reading: 5 ways to improve your credit score

Understanding your spending habits

Next, you should look back and examine your spending habits. Do you spend a lot of money each month on groceries to feed a large family? Do you order takeout or dine out often? With the right credit card strategy, you may be able to boost your reward-earning potential in different spending categories. For example, there are credit cards that offer extra rewards when you spend on certain categories:

When you choose a credit card that offers higher rewards for purchases you make frequently, you can earn more points, miles, or cash back (depending on the type of card).

Let’s look at dining as an example and imagine you spend an average of $1,000 per month on dining purchases. You could earn up to $20 per month ($240 per year) with a 2% cash back card (1% when you buy, plus 1% as you pay) like the Citi® Double Cash Card. The information for the Citi Double Cash card has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Now, assume you place the same $1,000 in monthly dining purchases on the Chase Sapphire Reserve. You would earn 3x points for a total of 3,000 Ultimate Rewards points (36,000 per year). Based on The Points Guy’s valuation of 2.0 cents per point, those 36,000 Ultimate Rewards points could be worth up to $720 in rewards. That’s a lot more bang for your buck. 

Understanding the different card types out there

Once you know the condition of your credit and identify your heavy spending categories, you’re ready to start sifting through credit card offers. At this point, you should try to figure out which credit card features are the most appealing and how you plan on redeeming your points. For example, you’ve got a post-crisis trip to Paris in mind, then a Southwest credit card is clearly not the best way to go. If you mostly redeem points for cheap domestic flights, then you’ll want to get a cobranded airline card or opt for a card that provides flexibility in transfer partners, like the Chase Sapphire Preferred Card.

Here are some common types of credit cards to consider:

Cobranded airline and hotel credit cards

Cobranded airline and hotel credit cards are ideal for people who are loyal to a specific program but not enough to earn elite status. These cards offer benefits that can make your travels a little more comfortable. With airline cards, you can expect free checked bags, discounts on inflight purchases and possibly even progress towards elite status. Hotel credit cards, on the other hand, usually offer mid-tier status that can result in perks like room upgrades, free breakfast and bonus points on paid stays.

Bank rewards cards

Bank rewards cards offer the ultimate flexibility in terms of redemptions. These cards often offer generous bonuses in everyday spending categories. When it comes to redeeming points, you have the option to choose cash back or transfer points to airline and hotel transfers. That makes these rewards extremely versatile. If you opt for a premium bank rewards card, you can even take advantage of valuable perks like airport lounge access, annual travel credits and more.

Our favorite  bank rewards cards include the Chase Sapphire Preferred, Citi Premier℠ Card and the American Express® Gold Card.

The information for the Citi Premier card has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Cash back credit cards

Cash back credit cards may be a good fit for people who prefer to keep things simple when it comes to credit card rewards. There are no rewards programs to track and you never have to worry about a card issuer devaluing your rewards. Cash rewards give you the ability to spend your earnings on anything you like.

Cash back cards like the Blue Cash Preferred® Card from American Express are great if you want to maximize everyday spending categories like gas, groceries, and streaming. The Citi® Double Cash Card is a unique option if you want to earn cash back rewards that can be converted to Citi ThankYou points for high-value redemptions.

No-annual-fee credit cards

No-annual-fee credit cards can be a good fit for people who prefer to minimize their out of pocket expenses when earning rewards. The Chase Freedom® is a great example of a high-value card with no annual fee. The card offers rotating 5% cash back categories where you can maximize your earnings. You can earn 5% cash back in rotating quarterly categories on the first $1,500 in purchases each quarter you activate. The best part is that if you have another card that earns Chase Ultimate Rewards points, like the Chase Sapphire Preferred, you can convert your cash back earnings into Ultimate Rewards points. Since TPG values Ultimate Rewards points at 2 cents each, you can get a bigger return on yours pending by using your rewards this way.

Related Reading: How to maximize your Chase Ultimate Rewards points

Understanding Basic Credit Card Terms

As you shop around for the credit card that ticks off all of your boxes, it helps to understand the basic credit card terms you’ll come across during your search. Knowing these terms will better enable you to compare offers from multiple card issuers and choose your favorite.

  • APR: APR stands for annual percentage rate — the interest a card issuer charges you stated as a yearly rate. A card’s APR may be less important than you think if you don’t carry an outstanding balance. With most credit cards, you won’t owe any interest if you pay your full statement balance by the due date.
  • Fees: Credit card fees are additional costs that may be associated with certain credit cards. Common fees to watch out for are annual fees, late payment fees, balance transfer fees, and foreign transaction fees — just to name a few. A credit card fee isn’t necessarily a deal killer, but you should understand what you’re agreeing to before you apply for a new account.
  • Minimum Payments: A minimum payment is the lowest amount of money you can pay each month to your card issuer. If you don’t pay the minimum payment, you may incur late fees and could damage your credit rating.
  • Perks: Aside from rewards, some credit cards offer other perks that can be extremely valuable. Airline fee credits, TSA PreCheck and Global Entry credits, airport lounge access, and rental car coverage are just a few examples.
  • Rewards: Credit card rewards are usually tied to how much you spend on the account. Rewards may come in the form of points, miles, or cash back you can earn and redeem.
  • Welcome Bonus: A credit card welcome bonus, also called a sign-up bonus, is an offer some card issuers make to attract new clients. Typically you must spend a minimum amount to qualify (e.g., $5,000) within a few months of opening your new account. If you meet the spending requirement, you’ll receive a certain number of points, miles, or cash back in return.

Understand your credit and qualifying requirements

We’ve already discussed how good credit is key if you hope to qualify for a new credit card. If you want to maximize your chances of being approved for a credit card, you should be familiar with other factors card issuers may consider too, like household income and outstanding debt. 

It may also help to review credit card application restrictions from different card issuers to see if any of them might hold you back. For example, American Express limits welcome bonuses to one per lifetime, while Chase will generally not approve you for a new card if you’ve applied for five or more cards in the last 24 months. Because of rules like this, you’ll want to apply for the highest Amex card bonus possible and keep track of your credit inquiries before applying for a Chase card.

Bottom line

Ultimately, choosing a credit card comes down to making a decision based on your personal needs. Choose a card that offers the most rewards on your biggest spending categories and helps you meet your future travel goals. Before you apply for the credit card, it’s important to be aware of your credit score and any card issuer limitations that could impact your ability to get approved or earn a welcome bonus. that you believe If you qualify and use your new credit card responsibly, it has the potential to be a great tool that can help you build credit while earning attractive rewards as a bonus.

Additional reporting by Ariana Arghandewal

Featured photo by The Points Guy

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More Things to Know
  • Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $750 toward travel when you redeem through Chase Ultimate Rewards®
  • 2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases.
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Intro APR on Purchases
N/A
Regular APR
15.99%-22.99% Variable
Annual Fee
$95
Balance Transfer Fee
Either $5 or 5% of the amount of each transfer, whichever is greater.
Recommended Credit
Excellent/Good

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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