Before examining the options the question needs to be asked – should I even get a credit card? Getting a credit card is often like telling yourself that you’ll eat just one chocolate or one potato chip… it goes downhill fast. Credit card companies are not in the business of losing or giving away money so you need to realise that any incentive they offer usually results in their net gain…or your net loss.
Comparison of Credit Cards and Use
What are the reasons for using credit cards? Do you have more than enough cash for your purchases and you simply want rewards? Or are you often spending beyond your pay and looking to save a little extra dough? The reason behind your use of the credit card makes all the difference as to which is the best for you.
Cash Back and Reward Cards When No Balance Carried
Do you pay out your balance every month? If you pay out your full balance only half of the time, you need to pass GO and head over to the next category of credit card users. Those who pay out their balances every month are looking for that extra perk or reward. Your interest rate makes no difference since you never use it and you have a healthy account balance to cover any emergencies that might be placed on the card – such as if your car breaks down on a trip. Look for the following types of cards:
- Rewards that match your spending habits
> Cash back
> Discounts at restaurants, hotels and car rentals
> Discount of air travel
> Shopping vouchers or merchandise
The key here is to have meaningful rewards that cover expenses you would normally incur and not using it to get some new exercise equipment to hang your clothes on.
But what about annual fees? Tread very carefully when it comes to fees. If you are a big spender that always pays your bills on time, you will need to run two scenarios where you pay an annual fee for higher rewards and one where you don’t. For example if you have $13,500 put on your credit card annually and it is paid off monthly:
- No annual fee card may earn $100
- $149 annual fee card may earn $300
So while the second option comes out ahead by $49 for the year, it would be worth using the no annual fee card if your expenditures are less than $10,000. Also look for any caps on cash back.
Low Interest Credit Cards
The other type of credit card user is one who carries balances every month. For whatever reason (and we are not judging here), you are spending more than you earn. What you don’t need is more incentive to spend…or more rewards. What you need is to keep your interest payments down and to pay aggressively on the debt. Thus, your goal in choosing a credit card will be:
- Low interest rates
- No annual fees
Some credit cards will have low interest rates as they are basically a secured personal line of credit. But your standard issue credit card can also come with decent interest rates with no or low annual fees. Just compare the difference it makes between a 21% interest and a 13% interest rate on a balance of $13,500 where you make the payment of $300 monthly.
- 21% interest = $13,283 in interest charges and 7.5 years to pay
- 13% interest = $5,111 in interest charges and 5.25 years to pay
Even if you factor in modest annual fees, the lower interest card saves you over $8,000 when repaying. Lowering your interest rate by even 1% could result in over $1,500 of savings in the above scenario. And remember that the other reward card only gives you a return if you keep spending. Thus, if you are trying to pay off a debt, get a low interest card.
The most difficult part about choosing a card is honesty and self-denial. Paying down debt is boring and getting new stuff is fun. It is easier to convince and deceive ourselves into thinking that we always pay our monthly balance in full and that rewards or cash back credit cards are the best bet. But look at your spending habits over the past two years and really scrutinise which will truly save you the most money in the long-run.