The Motley Fool

How to know if you have the right credit card

Plastic is used more often than cash these days, but when did you last check to make sure you had the best credit card for you?

If just thinking about the options is overwhelming enough, let alone actually having to make sure you wade through a long list of alternatives, I hear you.

So let’s keep this simple, and break it down by the way you use your card:

  1. You carry a balance most months (or every month)

Firstly, for the love of God, stop spending. Carrying a balance, and paying usurious interest is just fatal for your financial future. I’m not kidding. Stop, please.

But if you do have a balance that you can’t pay off before the bill is due each month, you should only be using low-interest cards. Yes, that’s an oxymoron — credit card interest rates are either high, stupidly high or criminally high — but you need to be as close to the left hand side of that continuum.

When you carry a balance, ignore annual fees and rewards programs: go for a (cough) low rate card.

  1. If you pay your bill, in full, every month

Firstly, congratulations. But don’t pat yourself on the back too heartily just yet.

You — rightly — feel good for not paying interest, but then you stump up $200 – $400 each year (and more for an extra card for your spouse) for the privilege.

If you know — truly, ruly know — that you’ll always pay the outstanding balance each month, then you should be angling for the card that carries the lowest annual fee, even if it has a higher interest rate. Because, if you’re really being honest with me, you never pay interest anyway.

  1. If you absolutely must chase card rewards

Remember, no credit card company gives you rewards out of the kindness of their hearts — they do it because it’s profitable to do so.

Which means… if you’re in a rewards program, the odds are good that you’re losing on the deal. Yes, you could be the exception that proves the rule. Then again, 90% of us think we’re better-than-average drivers, too…

If you carry a balance, you definitely shouldn’t be chasing rewards. You’re already paying a fortune in interest, plus an annual fee for the reward program. If you dislike money that much, find a good charity to give it to instead — they need it more than the banks do.

Now, for those of you that don’t carry a balance: If I can’t convince you to drop the rewards card, at least use it smartly. Recognise that it’s a form of ‘forced savings’. Choose cards with a high points-per-dollar ratio, and be careful of cards that cap the number of points you can earn each month.

Foolish Bottom Line

We increasingly live in a plastic-first world. It’s devilishly hard to spend — and live — without one. But with a little careful planning, and a lot of self-discipline, you can make them work for you — and not the other way around.


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