Depending on who you ask, a credit card is either a very useful financial tool or an incarnation of the devil. Your perception of credit cards is often colored by your personal experience, as it should, and it’s easy to see how a mountain of debt could make one despise credit. I’ve always seen them as useful tools, powerful in the hands of a responsible credit card user, and dangerous in the hands of someone unfamiliar with how they work. If you want a primer on credit cards, I invite you to read the Foundation series post, Basis of Credit and Debit Cards Explained .
Should You Even Get One?
Not everyone can use a credit card responsibly. In fact, the credit card companies work very hard to sign up the people who can’t use it responsibly because it improves their profit margins! I like to think of credit cards like a firearm. In the hands of someone who understands the power and danger of a firearm, it’s a tool that can be used very safely and very responsibly. In the hands of a novice or someone unfamiliar with its power, it’s dangerous to everyone, including the wielder. Credit cards are just like guns. To treat it any more lightly is to make a mistake, just ask anyone who has racked upany amount of credit card debt.
How do you know if you should get one? If you know you will only spend as much as you can pay off at the end of the month, no exceptions, then you should be OK. If you know you won’t ever carry a balance, you should be OK. If you aren’t sure, then you should forget about getting credit card. It’s a slippery slope, you don’t want to spend years extricating yourself from a few bad decisions. All the cashback rewards and all the convenience of credit is wiped away in a single moment if you can’t be responsible with it.
Picking the Best Credit Card
Always look at the terms and conditions of the card. They are required by law to put information in roughly the same format and in easy to understand language, the terms and conditions are your friend. You can use other tools to filter out cards for you but at the end of the day, you need to read the terms and conditions because they are subject to change and those tools aren’t required to keep things up to the minute accurate.
Never get a card with an annual fee. I don’t think any card is worth an annual fee. I don’t think the airline mileage cards are worth it but I’ve never had one, but I don’t think it makes sense to pay a company $65 so I can figure out their arcane rewards system and for them to dilute the points after I’ve earned them .
If you don’t carry a balance ever…
… then you’re really analyzing a credit card for the rewards. If you have been budgeting, you can determine your general spending categories and select the card that makes the most sense for your habits. For example, if you spend a lot on gasoline than you may want the Discover® Open Road card  because you get 5% cash back on gasoline up to the monthly limit. If you spend a lot at Costco, then you’ll want to get their TrueEarnings Card from Costco and American Express  because you’ll get cashback at Costco.
If you don’t budget, you should start and here’s a Foundation post on How to Budget . If you don’t have an idea of where you’re spending your money, you can’t pick the best cash back credit cards  for your spending habits… because you don’t know your spending habits!
If you are carrying a balance…
… then you’re really analyzing a credit card for the balance transfer offer and the APR you’ll be paying when the balance transfer offer ends. Here are the four numbers you need to know for your balance transfer:
- Balance transfer fee: This is the fee they will charge you immediately after you request the transfer. The standard rate is 3% with a $5-$10 minimum and either no maximum or a $75 maximum.
- Balance transfer interest rate: This is the interest rate your balance will accrue at. Ideally you want to get a 0% balance transfer  but a 3.99% or a 2.99% rate may be good too if it’s for a longer period of time.
- Balance transfer period: This is how long your balance transfer interest rate will be valid for, typically six or twelve months, but some cards offer periods “for life,” meaning the life of the balance.
- Purchase interest rate: This is the interest rate you will be charged on your purchases if you carry a balance from month to month. When the balance transfer period expires, your balance is treated like any other and accrues at this interest rate.
Should you care about purchase interest APR if you plan on paying off your balance? Yes, I think it’s admirable to think you’ll pay it off in the promotional period but you always want to plan for the worst, hope for the best. The plan for the worst is that you won’t pay it off and you’ll be subjected to the purchase interest rate.
Analyzing Rewards Programs
Credit card companies play a lot of games with reward “points” and their reward catalogs. I’m a firm believer that the best rewards are cash and so the best reward credit cards are the ones where you can get cash back rather than points based on your purchases. However, the number of cards offering cash back is dwindling and so the next best option are cards that offer gift certificates to places you already buy from.
The standard credit card reward offer is 1 point for $1 of spending, which equates to “1%.” If you can get a $100 gift certificate for 10,000 points, you’ve converted it on a 1:1 basis (you spent $10,000 to get the points and you’re getting a $100 gift certificate, which is one percent). Credit card companies will begin to dilute your points when they require 12,000 points for a $100 gift certificate or $10,00 for a $80 gift certificate. They can also dilute your points by requiring 10,000 points for a product that may retail for $100 but that you could buy on Amazon for $75.
If you have any student debt, the Citi ThankYou Network has “student loan certificates” that are paid out on a 1:1 basis, the best conversion rate possible for a rewards program.
If you’re choosing between cards of the same rewards network (American Express is all Membership Rewards, Citi is their ThankYou Network, etc.), then there’s no point in analyzing the rewards programs. If you’re choosing between cards with different percentage rewards, such as a 5% vs. a 3%, the reward differences won’t be greater than the percentage difference. This comparison only makes sense if you’re comparing two similarly percentaged rewards systems.
I didn’t make many recommendations on the best credit card because the best credit card will depend on you and your habits, not the recommendation of some guy on the Interwebs. I did make some suggestions, based mostly on my own spending habits, but I recommend that you research the offers yourself and find the best one for you, perhaps using my suggestions as a starting point if your habits are similar to mine.
One thing to remember is that there’s never a rush. Plenty of people live very happily and many people prefer to live without a credit card, so there’s no compelling reason to rush out and apply for the first credit card you see. Take the time to understand the card, it’s terms, and the ramifications of getting a credit card.
If I missed a point or if you have a tip, I’d love to hear it. Please leave a comment below!
(Photo by crocidillicus )