This post is sponsored by Credit.com.
A common question I get asked here at Optimistic Millennial is how to choose a credit card that’s best for you. It seems most people are aware there are great rewards to take advantage of with credit card usage, but they find the options confusing.
To help you out, I’ve compiled some basic explanations of credit cards and terms for understanding, as well as pointers on how to choose a credit card that works best for you.
How does a credit card work?
In the simplest terms, the two most common types of cards you might encounter are debit and credit cards. Debit cards withdraw funds from your bank account to pay a vendor/bill immediately at transaction time.
A credit card acts as an intermediary between you and the vendor. The credit card company pays the vendor/bill directly at transaction time and adds a “credit”, or amount you owe the credit card company, to your account. If you purchase $30 worth of gas on a credit card, you then owe the credit card company $30, but the gas station already received their payment from the credit card company.
If you use a credit card wisely, it’s simple and beneficial to you. If you don’t, it can put you in a tough position financially.
Why should I have a credit card?
If you haven’t noticed, it’s rare to see someone writing a check at Target to pay for their groceries, home furnishings, and seasonal décor – but, oh my gosh, how annoying is it when they do!?
Our businesses are mostly built around the use of credit cards. As a result, most vendors raise the prices of their good or service to account for the 1.5-3.5% transaction fee that they will pay the credit card company.
As a result, if you pay in cash – you are overpaying for your good or service. This should not be the only reason you should get a credit card, but it is something to consider.
Convenience is king among millennials and credit cards compliment that lifestyle. They are accepted in most locations and make it easy to buy goods and services. Thanks to Apple Pay, PayPal, etc., you don’t even have to carry the physical card on you in many cases!
Identity security is such an important topic today, so you must know that credit card companies take it seriously and build it into their business. If you discover a fraudulent purchase made by someone else on your account, the company will help you remove that charge and protect your information. Many of them will even incorporate a credit score check into your account.
Speaking of credit score, using a credit card responsibly is one of the best ways to build a great credit score, which allows you better options when making large credit purchases such as a car or home.
Up near the top of everybody’s reason for owning a credit card is the rewards they get for using it. Have something you value but can’t shell out the cash for? Find a card that gives you rewards on items you love for buying your everyday essentials on the card. From cash back, to travel, to hotels, to those with specific store or company benefits – there’s something for everyone.
How to choose a credit card that’s best for you
Do I have you sold on getting a credit card? Now it’s important to know how to choose a credit card that’s best for you. There are hundreds – thousands – of cards out there to choose from. Which is right for you?
Thankfully, Credit.com has created an excellent credit card finder that helps you figure out how to choose a credit card and compare multiple different options.
The tool allows you to select your credit score. If you haven’t checked your credit score, find out how here. Then you select what type of card you are looking for, such as best rewards cards, best cards for bad credit, or best cards for cash back.
From there, you just hit “find cards”! Simple as that. A list of cards will be shown with the card name, annual fee, APR, balance transfer, and credit rating needed.
You can read details about the type of card by going to “see details”, or just see a quick summary of the rewards icons below the card. Also, each card displays reviews left by card users, so you can see what they are saying about their experience with the card.
Last thing to know about the credit card finder is that you can filter your search in greater detail using the icon in the upper right. The filters let you narrow down to exactly what you are looking for.
Hopefully this helps you understand how to choose a credit card that fits your financial picture and needs. The finder is great because it recommends credit cards from a number of different companies. Personally, the cards I use showed up in the finder when I searched based on my credit score and preferences.
How do credit card companies make money?
As a word of caution, to make sure you are using your credit card responsibly, you should know how credit card companies make money.
The primary ways they make money are annual fees, interest, and transaction fees.
Annual fees are what you pay every year to have the credit card and enjoy its benefits. Fees generally range from $30 all the way up to $500 or more. Not every card has an annual fee and some have none.
Interest is the amount of money you owe the credit card company on top of what your actual charges were when you do not make a payment on time. In other words, how much you pay to borrow the money. An interest rate (known as APR – annual percentage rate), dictates how much you will be charged on your outstanding balance.
For example: If you owe the credit card company $100 at the time your bill is issued and you do not pay $100 by the due date, the credit card company will begin charging you interest on that amount, usually anywhere from 5-30% or more. Then you not only owe the $100, but also the interest that adds up during the time it takes you to pay that $100.
Transaction fees are a fee that the credit card company charges vendors or companies (whoever is collecting the money from you, the customer, in exchange for a good or service). Generally, for each credit card transaction, the business you are buying from has to pay the credit card company anywhere from 1.5-3.5% of the total of the transaction.
What should I watch out for?
Most of the readers of this blog are millennials or young adults, so they should avoid cards with annual fees in most cases. Full disclosure, I myself have a card with an annual fee, but the card I have has benefits that would be more expensive than the fee I pay and I use the benefit every year, thus actually saving me money. There are some cases like this where it makes sense, but unless you can spell out exactly where it saves you, avoid cards with annual fees.
Interest is the piece of credit cards that you have to be very careful about. It causes a snowball effect if you aren’t careful. If you can’t pay your bill in full every month, you should not have a credit card. You will pay unnecessary interest on items you could have purchased in cash. Worse yet, some cards have terms that increase the interest over time, making it harder for you to pay off what you owe. In short, do not charge any purchase that you cannot guarantee you will be able to pay in full every month.
My recommendation to someone who is looking for their first credit card is to find something without an annual fee, low interest rate (15% APR or less), and something that earns you general rewards such as points or cash.
Also, another thing to know if you are new to a credit card, not all types of credit cards are accepted at all businesses. Generally, you will find that smaller businesses may choose not to accept American Express, which has a higher transaction fee for business owners than something like a Visa. Keep that in mind if you are set on only getting one credit card, which is a good place to start.
There you have it! The foundation you need to understand a credit card, common terms, and how to choose a credit card that’s best for you. I hope you have found this post useful and make a point of diving into the credit card finder to see what the best options are out there for you.
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