There are hundreds of credit card options out there, and deciding which one to choose can be a tough task. There is no one best card. It’s all about picking the right credit card for your financial situation.
With that in mind, here’s a guide to what you should look for based on your goals, habits and finances.
Different types of credit cards and situations
For starters, there are several different types of personal credit cards.
- Cash back cards
- Travel rewards cards
- Balance transfer / zero-percent interest
- Retail / gas / home improvement project
- Secured cards
Each of these has different advantages and disadvantages depending on your personal situation, such as:
- You already have credit card debt and have no plan to pay it down
- You already have credit card debt and are trying to pay it down
- You have poor credit and are trying to rebuild
- You have decent to good credit and want to reap the benefits
- You travel often and would like to save money on your trips
- You have a specific trip in mind and would like to reduce the cost
- You have a specific purchase or project and want to make the most of it
Reasons to use a credit card
Before you can choose the right credit card, you need to understand the reasons you should or shouldn’t use them in the first place.
Credit cards are like a chainsaw: Use them properly and they are a great tool that can make your life a lot easier; use them poorly and you’re going to make a mess of things or hurt yourself.
What makes them such a powerful tool vs. cash or debit?
- They carry additional protection from fraud.
- They can reward you for your normal spending.
- They often have added benefits, like extended warranties, travel protection, and even life insurance.
- They come with built-in budget tracking.
- They are safer to carry than cash.
- They help you build creditworthiness, which can save you money on other loans.
Reasons you should not use a credit card
Improper use of credit cards puts tens of thousands of people into a financial tailspin. People make the mistake of thinking the limit on their credit card is “their money,” when in reality they are living with very little wiggle room in their budget.
Credit cards are very expensive loans. Never lose sight of that. If you carry a balance on your cards, you are paying significantly more than the sticker price for every single thing you buy from that day forward until your balance is paid.
You should strongly consider avoiding credit cards altogether if:
- You are unable to control your spending when using a credit card.
- You can’t pay off new charges every month.
- You are concerned about keeping your spending private.
If you cannot use credit cards responsibly, you are much better off ignoring the rewards and focusing on building stronger spending habits.
What does responsible credit card use look like?
- You pay off new charges in full and on time every month (with caveats I’ll mention later).
- You pay down existing credit card debt.
- It builds creditworthiness.
- It has a neutral or positive effect on your net worth.
With that said, let’s look at how to find the right credit card for your situation.
You already have credit card debt and have no plan to pay it down
If you are already in credit card debt and are looking for a new card in order to add to your debt, there is no good card for you.
Simply put, you need to make radical changes in your lifestyle. I can’t encourage you to find another credit card.
You already have credit card debt and are trying to pay it down
This is where many people need to start. If you currently carry a balance on one or more credit cards, your first goal is to bring that balance to zero.
However, it may be wise to take out a zero-percent interest balance transfer credit card if you can be disciplined enough to do it right.
With this card, you transfer as much of the balance as you can from a higher-interest credit card. This cuts the amount of payment you have going toward interest, hopefully in a significant way. Then you would most likely pay the minimum on the new card and continue to attack the high-interest card, but more of your payment will be going to pay down your debt.
There are two key variables to look for when considering a balance transfer card: length of the offer and transfer fees.
Each card will have its own timeframe for how long your balance transfer will sit penalty-free. Some are 12 months, some 18 months, etc. There also may be fees associated with transferring the balance, with up to 5% being common. So how do you choose?
Well, it comes down to some basic math. If you know how to use a spreadsheet like Excel or Google Sheets, this is really easy. If not, you can still get there by hand.
The question you’re trying to answer is how quickly you can pay down the debt and how much interest you’ll pay if you didn’t do a balance transfer. To help with that, check out this calculator.
Next, you rerun that calculation but subtract how much you think you would transfer to the new card. This is probably a guess, because you don’t know until you apply for a card what limit you’ll get. But you can usually figure on $2,000-$5,000 depending on your credit score.
Now that you know the difference in interest charges with and without the balance-transfer card, you can see whether the fee for the card you’re looking at will actually save you money.
Firstly, 3% or 5% is a lot lower than 15% or 18% over 12 months or more. (You may be thinking that’s always the case, but it’s not and I’ll show you why.) The best option probably is to find a card that has at least 12 months of interest-free cushion and no transfer fee. They do exist, but there aren’t many.
If you expect to pay down your high-interest card quickly, as in less than six months, it probably doesn’t make sense to do a balance transfer. You’ll likely pay more in transfer fees than interest. To see why this is, you should read about how credit card interest is calculated.
What I like to do for people I coach is to create a spreadsheet that shows exactly how much they will pay each month to each card, when the interest-charging card will be paid off, and how much should be left on the balance transfer (if any) when the grace period expires. That helps to see why it’s important to pay the amount we discuss, and it allows me to show them how even small extra payments can make a big difference over time.
One last note: You usually can’t do a balance transfer among the same card family. So if you have a Chase credit card that is charging interest, you won’t be able to do a zero-interest balance transfer to a different Chase card. You’ll have to find another institution.
You have poor credit and are trying to rebuild
First and foremost, if you’re trying to rebuild your credit rating you need to address the reasons it is low in the first place.
If you have delinquent payments, unpaid debts, or even errors on your credit report, that’s the place to start. Good credit card usage isn’t going to fix the root problem. If you haven’t already done so, go to annualcreditreport.com and pull your reports from the three credit agencies to look for errors and outstanding issues to be resolved.
Once you have cleaned all of that up to the best of your ability, you can start to rebuild your credit. The most important thing is to continue to pay your bills — mortgage, car payment, utilities, etc. — on time and in full. If you already have a credit card, use it responsibly. You don’t need to get another card.
If you don’t have a credit card, you can apply for a regular unsecured card first. These are the cards not tied to a specific retailer. Look specifically for cards that say they are available to people with low credit. (You can search for this. Here’s an example list from The Simple Dollar.)
If you are denied for the unsecured card, you can try a retail card. Most stores and gas stations offer a branded credit card. These are not great general use cards, but they will get you started on rebuilding. They will likely have low limits of less than $1,000, and the only discounts or rewards will be on purchases at that retailer. You will want to put small amounts on these cards each month and pay them in full. After a year of this, you may qualify for the regular unsecured cards you were denied for previously.
If you still don’t qualify for a retail card, your next step is a secured card.
With secured cards, you pay the credit issuer a deposit up to the limit of the card. So if you have a $200 limit, you pay a $200 deposit and then use the card like a regular card. You still get a bill monthly, it still accrues interest if you don’t pay it, but the company has your deposit as backup. If you show good credit use over time you can often upgrade the card to a normal unsecured one.
You have decent to good credit and are looking to reap rewards
If you have good credit and aren’t getting rewards from your credit card, you’re missing out.
The main rewards are cash back, discounts, and points, which can be used to offset costs, purchase things, or cut travel expenses. I’ll get to travel rewards in the next section.
Generally speaking, if you don’t do much travel the best thing to look for is a good cash back card. Many cards offer 1.5% cash back on all purchases. Some offer more cash back in certain categories — like dining, travel, gas, etc. — and less on the rest. It helps to understand your spending patterns a little if you really want to maximize that reward system.
There are also cards that offer 1% cash back when you purchase something and another 1% back when you pay off the charge.
There’s no right or wrong answer with cash back. It’s about finding a card that works for you.
Many card issuers also have a points system, where you get so many points per dollar spent and bonus points for dollars spent in specific categories. You can then redeem those dollars for cash back, “erasing” a charge from your statement, or gift cards for restaurants and merchants.
Not all card points are redeemed equally. For more on what specific cards have better point redemption deals for gift cards, see this article from The Simple Dollar.
You would like to spend less and travel more
Travel rewards cards are an entire ecosystem unto themselves. There are dozens of websites that specialize in just maximizing travel rewards benefits through credit cards.
I Dream of FIRE isn’t one of them.
I’m a very low-level travel hacker, but I have saved more than $4,000 this year with just a few simple credit card decisions. If you travel, I believe learning the basics of travel hacking is the best bang for your buck and something most anyone can grasp pretty easily.
That said, there are some overarching ideas that you should consider when looking for a travel rewards credit card.
First, of course, is always pay your card off in full. Paying the crazy interest credit cards charge in order to get travel rewards points is the opposite of good financial sense.
The key to making travel rewards work is not really the points you earn per purchase, but rather the bonus points you earn for hitting a minimum spending threshold shortly after opening the card. You may have to spend $1,000 to $4,000 in the first three months of opening the card to get 40,000-100,000 points. Those bonus points are where you earn flights and nights, not so much the regular spending.
You’ll want to look for cards that align with your travel plans and habits. If you have a specific trip in mind, look for cards that will work with that itinerary. That could mean targeting a specific airline or hotel chain to earn seats and rooms for that trip.
If you don’t have specific plans, think about the types of trips you usually take. Don’t sign up for a Southwest Airlines credit card if the airport you fly out of doesn’t have many Southwest flights. If you’re in a Delta hub then the Delta branded card could be a good option for you, but maybe not if you fly out of an airport where Delta flights are more expensive.
Also consider the additional perks of the cards you choose. Cards with a high annual fee often have significant extras attached to them. If you plan to do a lot of travel, some of the extended protections, reimbursements, and travel niceties such as priority boarding, lounge access, and upgrades are worth the added expense.
In the absence of specificity, look for a good general travel points card that you can use with many airlines, hotels, and rental car companies to give yourself the best options.
You have a specific project or purchase in mind
This last category is a less frequent need, but something to consider.
You know when you see ads that offer 0% interest or same-as-cash deals, maybe for furniture, roofing, appliances, and the like? Most often they extend those offers when you sign up for a credit card.
While the cards themselves may not offer great rewards, for the specific purchase you’re making they could be just what you need.
For instance, I signed up for a credit card when I bought my new furnace and air conditioner in order to extend the payments to 18 months with no interest.
In other offers you might get a discount on the purchase price for opening the card. I wouldn’t suggest doing this for purchases less than $1,000 very often. Opening too many cards could hurt your credit score (although this isn’t always the case), and the discount should be substantial to entice you to sign up.
If you have the cash to pay off the purchase immediately, it might be better to open a travel rewards card and use the big spend to hit your minimum target instead.
These project or retail cards are not cards you typically want to use for everyday purchases. They don’t offer the same kinds of rewards as the others mentioned above. But they can make sense in certain situations.
An enormous caveat, though: If you do a zero-interest card you’ll want to pay it off in full by the end of the specified period. Read the fine print for your specific situation, but most cards will say if the balance is not paid in full by the end of that period you will be charged the full back interest for the entire purchase price. Not just the balance. The full price.
For me, that meant paying more than double the monthly statement minimum payment every month for 18 months to make sure I would not see a penny of interest.