Credit cards get a bad rap as harbingers of debt and doom, but that’s like blaming knives, guns and C-4 explosives for the pain and destruction they cause. If used wisely credit cards are a convenient and even profitable way of paying for stuff.
We all know that credit cards can be useful tools, but it doesn’t mean everybody should have one or that you shouldn’t be selective when choosing which you carry in your wallet.
The key to finding the best credit card for you is to determine first what type of a consumer you are and what you want out of your card. This guide simplifies the entire process by reducing it to five questions.
What’s Your Credit Score?
If you don’t know, this is the first step to finding out which is the best credit card for you. Your credit score is a number that gives lenders a picture of your financial health and credit trustworthiness. It’s also a quick and easy way to filter what type of credit cards are available to you. You can get your credit report, which is the basis for your credit score, for free at Annual Credit Report and for a few bucks you can buy your credit score from all three credit reporting agencies. Here are reviews of on the top rated credit reporting companies.
We recently shared a list of the best credit cards for 2014. The catch is that all the cards on that list require a good to excellent credit score.
The higher your score, the lower the interest rates and the better the rewards credit card companies will offer you. The credit score ranges below give you an idea of what type of credit cards you can expect to qualify for based on your current credit score.
Credit Score 550 or Under
If your credit score is below 550, most companies will not give you credit unless you place a security deposit, which then becomes your line of credit. Also, you will probably have to pay hefty monthly fees. You best bet is to focus on building your credit by applying for a secured credit card with a credit union. Credit unions usually charge lower fees and are more understanding with consumers with poor credit scores. Once you establish a track record of responsible borrowing your credit score will increase and you will qualify for better deals.
Credit Score 550 to 640
If your credit score is between 550 and 640, you will still struggle to qualify with most credit card issuers. You do have a chance, though, particularly if you have regular income and little or no credit card debt. If you do qualify for a card, you should expect to pay an annual fee and receive only a low credit limit. At this stage, the best credit cards are still out of reach, so your main goal should still be to build your credit by regularly paying off the entire balance of your credit card, without worrying about what rewards you can get from your credit card. Here is a list of the best credit cards available for consumers with bad credit.
Credit Score 640 to 720
Congratulations, you have good credit and you qualify for a wide variety of credit cards with generous rewards programs. At this stage, carefully comparing the pros and cons of each credit card is crucial. You may still struggle to qualify for the top cards, but there’s plenty to love about the cards you do qualify for. Look for cards with no annual fee and generous cash-back signup deals.
Credit Score 720 and Higher
Welcome to the elite of credit card consumers. Credit card companies want your business and will try to buy your love with low-interest balance transfers, large signup bonuses, generous travel perks and huge lines of credit. However, make sure you keep your spending in check and avoid carrying a balance. The moment you carry a balance from month to month, you cancel any benefits you receive in interest payments.
Do You Carry A Balance?
Credit cards are convenient tools to pay for things, but they are a lousy way to get a loan. If you carry a credit card balance you cannot afford to repay, your first financial priority should be to pay off your debt as soon as possible. If your credit score is high and you think you could repay your debt within a year, apply for a balance transfer credit card with a 0% APR introductory rate for the first 12 months or more and a 0% balance transfer fee. These cards allow you to consolidate the balance from other credit cards into a single card with lower rates.
This is not easy as most balance transfer cards try to offset the cost of a low interest teaser rate with an upfront fee, but they do exist. Here are the three best credit cards for people who carry a balance.
Even if your credit score is not great right now, you may still be able to transfer your current debt to a balance transfer card. Just make sure the balance transfer fee doesn’t negate the savings you receive from switching.
The average interest rate for balance transfer credit cards (once the teaser rate expires) is 15.66% while personal loans have an average interest rate of around 10% (Bankrate). If you don’t think you can pay off your debt within the 0% introductory rate period or you don’t qualify for a decent card, you are probably better off getting a personal loan from your credit union or bank. Homeowners also have the option of using a line of credit, which offer really low interest rates (5% or lower). The catch is you switch your credit card debt from being an unsecured loan to debt secured by your home. This could put your home at risk if you are unable to make monthly payments.
Do You Own A Business?
If you own a business, even if it’s only a one-person business, you may benefit from having a business credit card. Credit card companies love the greater spending power and higher volume of sales they get from companies and are willing to sweeten the rewards they offer to attract their business.
The credit card with the highest sign-up bonus and one of the most generous rewards programs is Chase’s Ink Plus Business card. It offers 50,000 bonus points (equal to $625) after you spend $5,000 in the first three months and 5 points for every dollar you spend on select categories.
What Type of Credit Rewards Are You Interested In?
There are two main types of credit card reward programs, cash-back, and travel rewards. I’m a travel junkie so I’m a sucker for travel rewards programs such as Chase’s Ultimate Rewards and Barclaycard’s Arrival program.
Travel rewards programs offer large signup bonuses if you spend a certain amount with a set period of time. They can also provide extra discounts if you spend your points on travel purchases. For instance, Barclaycard’s Arrival Plus World Elite Mastercard gives you 40,000 bonus miles if you spend $3,000 in three months. You get 10% back off the miles you redeem for travel purchases, such as flights, car rentals, and hotels.
Cash-back cards give you real cash for every $1 you spend. If you’re not an avid traveler, cash-back cards provide the most profitable and flexible way of earning money from using your credit card. The top cash-back cards also offer generous sign-up bonuses. The American Express® Blue Cash Preferred gives you $150, if you spend $1,000 within the first 3 months.
What Do You Spend Your Money On?
Once you determine what credit cards you qualify for based on your credit score and what rewards you want from your credit score, you can fine-tune the card you choose based on your spending patterns. You can even get a different credit card for every major spending category, such as gas, groceries, dining, and so on. This method is particularly effective if you prefer cash-back cards. The best rate of return you can hope to receive from travel reward credit cards is 2 points per dollar.
Here is a two credit card combo that works well for many households. There are many other possible combinations depending on your spending habits.
The American Express® Blue Cash Preferred gives you 6% cash back at U.S. supermarkets up to $6,000 per year and a no limit cashback on gas purchases. This card does have a $75 annual fee, but it pays for itself if you just spend $26 a week on groceries.
Citi’s Thankyou Preferred Visa Card has no annual fee but offers 2 points for every dollar spent on eating out and entertainment, the two major spending categories American Express® Blue Cash doesn’t cover.
The Final Step
Now that you have a better idea of what type of credit card user you are, you are in a better position to choose the best credit card for you. There are hundreds of credit cards available so it pays to carefully compare the deals available.
SuperMoney offers a powerful search engine that filters the top credit cards based on your credit score, whether you want cash-back or travel points, fees, and on what purchase categories you spend the most money.