You can’t go more than five minutes these days without someone thrusting a credit card promotion in your face. “Claim this $300 sign up bonus. 0% APR for the first twelve months.” They get you in the mail, on TV, and in every corner of the web.
With a seemingly endless range of options, deciding on which credit card is right for you can feel like an impossible task.
And of course, once you settle on one, you then need to roll the dice to see if you qualify. If you don’t, you’re back at square one.
Today, we’re going to plunge headfirst into the frothy ocean of credit card offers to understand what matters most and how to separate the signal from the noise.
Our goal will be to make choosing credit cards a straightforward process by focusing on a few key perks and essentially ignoring the rest.
So if you’re feeling overwhelmed by an incessant bombardment of credit card offers, or want a straightforward strategy for choosing a card, this lesson is for you.
Analyzing Your Spending Patterns
Okay, so we have established that finding a credit card is a stressful process. And while part of the problem is an overabundance of options, the bigger issue is that we don’t even really know what we need.
Acknowledging this, before you so much as peek at a another credit card offer, there is a much more fundamental step you need to take. And it has nothing to do with bonus cash or APR.
Instead, it has everything to do with who you are, and more importantly, how you spend your money.
To start, figure out how much money you spend each month. And specifically, figure out how much of that you can spend on a credit card.
Keep in mind that some expenses like rent, utilities, and estimated taxes aren’t typically eligible for credit cards. Or if they are, they tack on an extra 3% or 4%, which is never worth it.
By calculating how much you can feasibly spend on a credit card, you can determine how much use your credit card is going to get.
This is important because a lot of cards include an annual fee, typically in the $50 to $200 range. If you spend enough money on a card, the value of the perks the card offers will exceed the annual fee, in which case you net out a profit.
On the other hand, if you only spend a couple hundred dollars per month on a card that has a $50 annual fee, and your spending results in just $20 of credit card perks, you’re now $30 in the hole. So that would be a bad deal for you.
You can take things a step further by categorizing your monthly spending. How much do you spend on dining out? How about groceries? What about travel?
Credit cards often align their perks to specific spending categories, so by understanding where most of your money is going, you can narrow your search down to cards that are optimized for your spending patterns.
For example, I do a good amount of international travel. As a result, I prioritize cards that give extra points for booking flights and hotels, and that don’t charge foreign transaction fees.
The more familiar you are with how you spend your money, the easier it will be to refine your search. So spend a good amount of time on this process.
And as an added bonus, this budgeting exercise will give you a better understanding of your finances more broadly, which is an important step in establishing your financial security.
Let’s switch gears now to talk about APR.
In the intro, we talked about “signal” vs “noise”. Signal is the stuff that’s worth paying attention to. Noise is the stuff you should ignore.
APR is noise. At least, it should be, if you’re using your credit card responsibly. Remember, you should never carry a balance on your credit card. Meaning you should always pay your card off, in full, every month.
If you always pay off your balance, you’ll never be charged interest. And if you’re never charged interest, the APR is totally irrelevant.
If you aren’t paying off your balance, it means you’re spending more than you can afford to pay. And that means you’re not ready for a credit card. In that case, stick to a debit card until you can keep your expenses consistently below your take home pay.
So, just to be clear, ignore APR completely when choosing your card. As long as you don’t carry a balance, it will have zero impact on you.
Matching Your Credit Score
Now let’s discuss the all important credit score.
In another lesson, we discussed how your credit score is calculated and how you can find it. Your credit score will, to a large extent, determine what credit cards you are eligible for.
While credit card companies won’t tell you exactly what score you need for any given card, most credit card review websites will tell you what the expected credit score is for the cards they review.
If you’re new to the credit card game, chances are your lower credit score won’t qualify you for the higher-end cards. Which is fine, because most of those have higher annual fees and perks that aren’t applicable to you anyhow.
Also, keep in mind that the credit score requirements are estimates. I’ve qualified for cards that punch above my weight class, and I’ve been rejected from cards that should have been a no-brainer for my credit score.
The reason for the variability is that the credit card companies are factoring in a lot of other data points, like your income, your home address, and other frighteningly personal information they have on you.
When you apply for a credit card, you get what’s called a “hard inquiry” on your credit report, which indicates a company checked your credit score recently. These are the same hard inquiries you get when you apply for a mortgage or auto loan.
Hard inquiries stay on your credit report for two years, and if you accumulate too many of them, that can lower your credit score.
So be thoughtful before you apply for a credit card. If you already have a few hard inquiries on your record, make sure you fit the credit score profile before submitting your next application.
Sign Up Bonuses
Now on to sign up bonuses.
A lot of cards will try to win your business with juicy offers like hundreds of dollars in statement credit, discounts on popular services, or a big batch of points. These offers are mostly honest and some credit card enthusiasts can actually turn a decent profit by cycling through new credit cards to collect these offers.
Just keep in mind that most offers are tied to a minimum spending threshold, so if you don’t anticipate spending that much, don’t factor the bonus into your decision.
Also remember that most offers only apply to the first year, so if you’re looking for value over multiple years, the initial sign-on bonus isn’t particularly relevant.
In other words, don’t use the sign-on bonus as your primary reason for choosing a card.
But if you’re in the market for a card, and you anticipate a large expense in the near future (like a vacation or birthday), you might want to time things such that you apply the large expense toward meeting the spending threshold for the bonus.
My Suggested Approach
So that sums up the major considerations when selecting a credit card.
The most important thing by far is to get a clear understanding of your spending habits so that you can find a card that best matches your needs. This empowers you to make a well-reasoned choice rather than passively submitting to the flashiest promotion.
In fact, since no single card will cover all of your bases, it’s totally appropriate to get two or three cards with different perks. That way, you can strategically use the appropriate card for the appropriate situation.
But if you’re new to the game, my suggestion is to keep things really simple. Ignore bonuses that pressure you to spend more than you should and ignore the APR which is irrelevant as long as you pay off your balance in full.
Just focus on a basic, no-fee credit card that has a transparent cash-back program. I recommend cash-back because it tends to be more straightforward to redeem than points, so it’s a good place to start.
So once you’ve done a robust self-assessment on your spending, head on over to a reliable credit card review website like NerdWallet or The Points Guy, and use their category filters to hone in on a card that best matches your needs.
Keep in mind that these review websites get paid to promote the cards they review, so their ratings can be biased, but regardless, they still offer a solid overview of what’s on offer.
There’s no question that choosing a credit card can be a stressful process, but hopefully this walkthrough makes things easier by focusing you on the factors that really matter.
Now that I’ve shared my thoughts on selecting credit cards, I’d love to hear your thoughts. What do you prioritize in a credit card? Are there any red flags you look out for during the process?
Share that with me and the other Wealth Stakers in the comments below.
Also, if you enjoyed this video, don’t forget to subscribe and share this with anyone who loves building wealth.
With that, I bid you adieu, and happy Wealth Staking!