Choosing a credit card can be overwhelming. To get the best deal, make sure you avoid the most common mistake: mixing your spending and borrowing on the same credit card. Credit cards that offer the best rewards generally have the highest interest rates. Credit cards with the lowest interest rates tend to have the worst (or no) rewards.
Ideally, you never need to borrow money and can just focus on earning the most miles or cash back. But if you are part of the 38.1% of American households with credit card debt, you should shop for a lower interest rate to get out of debt faster.
To select the best credit card, ask yourself these questions:
For people who have credit card debt: Are you paying a high interest rate on your existing debt?
For people who want to use a card to spend: Would you be happy to earn free travel? Or do you only want cash?
And if you want to earn free travel: Should you get an airline-specific credit card or an all-purpose rewards credit card?
By answering these questions, you can make sure you earn the highest rewards for your spending and pay the lowest interest rate on debt. And there is good news: the battle between credit card companies continues to heat up, and deals are only getting better.
1. Do You Have Credit Card Debt Already?
If you already have debt on a credit card, you are likely paying a high interest rate (the average rate is 13.61%). If you call your credit card company and ask for a rate reduction, you will likely only see a reduction of 1% or 2%. With a balance transfer, you can reduce your rate to 0% for up to two years.
What can I save? If you have $5,000 of credit card debt at a 13.61% interest rate, you could pay up to $758 of interest over the next 15 months. With the best no fee balance transfer credit card, you would pay no fee and no interest for 15 months. That means you would save up to $758 over 15 months.
How can I find the best deal? To take advantage of a balance transfer, you need to move the debt from one bank to another. You cannot move debt between two credit cards offered by the same bank. You should shop online for the best balance transfer credit card at sites like MagnifyMoney or NerdWallet.
Things to remember: These deals are typically only offered to people with good credit. Although there are a number of balance transfer offers with no fees, most balance transfers charge a fee up-front. You should do the math, but the fee is usually worth paying if it will take longer than six months to pay off your debt. Opening a new credit card will have a short term impact on your credit score. If you plan on applying for a mortgage in the next six months, you might want to wait before applying for a balance transfer credit card.
2. Do You Want To Earn Free Travel Or Cash?
With a credit card, it is easy to earn rewards. The best value typically goes to people willing to use their rewards for free travel. If you want to earn free flights or hotel stays, skip to the next section and get a travel credit card. But if you would just like to get some extra cash, consider a cash back credit card.
It is easy to earn at least 2% cash back on everything you spend. Depending upon where you use your credit card the most, you can find even higher rates of cash back in certain categories.
What can I earn? If you spend $1,000 a month on your credit card, you should be able to earn at least $240 every year in cash back with the best flat-rate cash back credit card (Citi Double Cash). You can boost that return even further with cards that offer higher cash back rates in bonus categories. For example:
6% cash back on up to $6,000 per year of supermarket spend with American Express Blue Cash Preferred
5% cash back (unlimited) on gas purchases from Fort Knox Credit Union (anyone can join the credit union)
How can I find the best deal? If you only want to use one credit card, Citi Double Cash is the best deal. You earn 1% as you spend and 1% as you pay. If you spend a lot of money in particular categories, you can find the best cash back earn rates in each category updated here.
Things to remember: Cash back only makes sense if you pay your statement balance in full and on time every month. Interest rates on cash back credit cards are not low, and the interest due could exceed the cash back you earned very quickly.
3. Travel Rewards: Do You Want An Airline-Specific Or All-Purpose Rewards Card?
Travel rewards are lucrative. But should you get an airline-branded credit card or a general-purpose rewards credit card? Airline-branded credit cards can be very useful if:
You do not have elite status on an airline, but plan to fly a few times and check your bags. Most airline cards will waive checked bag fees and offer expedited boarding.
You travel frequently on an airline, and want to top up your existing mile balance, earn elite status quicker or get access to the airport lounge.
If you do not need the benefits of an airline-specific credit card, an all-purpose rewards credit card could make more sense. You typically have the opportunity to earn points faster and have a wider array of redemption opportunities with cards like Chase Sapphire Reserve or American Express Platinum.
What can I earn? When done properly, the earnings potential is enormous. The sign-on bonuses are very generous. Many cards offer 50,000 points, which could easily be worth more than $700. You also typically have the chance to earn more points on your everyday spending. Chase Sapphire Reserve pays 3 points for every $1 on travel and dining. American Express Platinum pays 5 points for every $1 spent on flights.
How can I find the best deal? Finding the best travel rewards credit card is not easy. That is why there are websites (and an entire cottage industry) dedicated to finding the best deals. The most famous site is ThePointsGuy. You should also consider MileCards, which has a calculator to help match your spending pattern with the right product.
Things to remember: Most travel rewards credit cards are only available to people with good or excellent credit. Bonus offers have considerable spending thresholds (for example, $3,000 of spend in the first 90 days). If you can’t afford the spending threshold, don’t go into debt just to earn free travel.