MJ.$ reader Patrick asks, “How do I pick the right credit card? I don’t know which one to get and I’m confused by how points and interest work…”
Credit cards are part of modern life. If you don’t have one, it’s time to consider getting one. If you do have one, make sure you’re getting the full value out of it. If you have an entire wallet full, that’s another blog post…
The biggest benefit of using credit cards is NOT earning cash back or reward points. If you do things right, sure, those can be significant benefits. I know people who have traveled the world on credit card points (In fact, we paid for our honeymoon to Southeast Asia with credit card points accumulated over two years).
The largest benefits of credit cards are convenience and fraud protection. It’s easier in most cases to use a credit card over cash, especially now with many restaurants and stores not accepting cash due to COVID-19 concerns. Credit cards provide protection against fraudulent purchases (but debit cards don’t necessarily). Cash obviously carries no protections against theft.
Rule number one remains “pay your credit card balance off in full each and every month”. If you cannot pay off your card every month or are paying down a balance, you might be best served to steer clear of credit cards for now.
When should you get a card?
In college or soon after graduation, get a credit card. Having a card in college can teach responsibility, provide emergency liquidity, and begin establishing your credit history. Your first credit card should have a small limit of $500-$1,000. Your credit limit will grow over time as you display responsible habits.
It’s obvious, but worth repeating, that banks don’t lend money to people when they’re desperate. Maybe you need to read that sentence again. Just like your professional network, you want to build your credit well before you need it. So, apply for a credit card before you need the liquidity and slowly build up a strong credit history.
Which card should you get?
Never get a credit card at a retail store. Coming from someone who has made this mistake before, there’s no discount in the world to justify a store card. There aren’t enough benefits and you can only use it at one place.
If you enjoy travel, or would like to travel, a card that rewards you with points can be great. The value of travel cards is particularly concentrated around signup bonuses. The alternative to a travel card is a cash back card. Both are good options.
If you don’t spend much or aren’t interested in rewards, then just get a card without an annual fee. But how do you know if your spending justifies a cash back or points card with an annual fee?
There are many options for cash back and rewards cards. An example of a rewards card might be a $95 annual fee and an offer of 60,00 bonus points (worth ~$750), if you spend $4,000 in the first 3 months. If you achieve this spending level it’s a great deal.
After the first year, as long as you spent $1,000 per month the rewards would be worth the $95 annual fee. You should do similar calculations based on your own spending (you’re using my Net Worth Tool, right?).
Do you typically spend enough to justify the annual fee? 1 If not, you might wait until you have a large purchase coming up or perhaps a rewards card isn’t for you. Again, If you don’t go for a cash back or rewards card, make sure your credit card has no annual fee.
What else should you know?
Did I mention pay off your balance every month? If you can’t pay the whole balance monthly, pay at least the minimum and create a plan to eliminate credit card debt.
Really, you don’t need more than one or two credit cards. Overcomplicating things will just open you up to fees and making mistakes. Keep it simple and set up automatic payment for the minimum balance due (often $35) and then pay off the remainder.
You can run most of your expenses through your credit card and pay it off in one or two payments each month to earn points on everyday purchases. Any purcahses that charge an additional fee to use a credit card should be avoided.
Want more? Check back next week for a deep dive into how credit card points paid for my honeymoon in Southeast Asia.