• Alex Mizerski

How to choose a credit card

Updated: Feb 21, 2021

Credit cards, to some, are a bad word. Something to be avoided at all costs and in certain cases I absolutely agree. As I've gotten older and wiser about how to manage my money I have come to realize a few benefits of having a credit card.


Today I'm here to share that wisdom and what to look for when choosing a credit card.


How to choose a credit card

A credit card has the potential to get you into trouble through overspending and the potential to impact your credit score. The type of negative impact poor credit management can have will really set you down a tough path as you try and save more, make more, and grow your net worth.


If you are in a position to have a credit card (or two) and to manage them wisely then awesome for you. Not everyone has the ability to manage their spending responsibly, pay their credit card bill in full every month, and live within their means. It is a big responsibility and knowing if you are ready for speaks to one's maturity and self-awareness. If you are able to handle a credit card or feel you are ready to take the plunge, then I've got a few suggestions for how to find the right one. Follow these steps to improve your credit score quickly.


  1. Check your credit

  2. Determine your amount of expendable income each month

  3. Determine your type of credit card reward

  4. Do your research on the card(s) that meet your criteria

Check your credit

Once a year you can get a free credit report from any of the following places.


Annual Credit Report

Experian

Equifax


It is important to know your credit score in advance of finding a credit card so you can get a sense of what types of credit cards you will qualify for. Checking your credit score will also point you toward a few ways that you can possibly improve your score. The better your score, the better offers you will get from credit card companies. If your score isn't quite where you want it to be, having a credit card and making on-time payments, will help your score improve and get you better credit card offers in the future.


Determine your amount of expendable income each month

This can be easier said than done. There are plenty of tools out there that can help (PocketSmith is one of my favorites even though it's not free). Most banking apps also have the ability to determine your expendable income. Or you can build an excel file to track income vs expenses. The difference is your expendable income each month.


If you want to take that to the next level you can build an income and expense report for a full year. Projecting any bonuses, tax returns or payments, one time expenses like car registration, etc. That is totally next level and will give you a sense of your expendable income for a full year.


Once you have your expendable income identified you know what the MAX your credit card bill can be per month. This is key to utilizing a credit card in a way that protects you from the terrible cycle of paying credit card interest. This is also how to improve your credit score quickly. If you want to make using a credit card more complicated you can start to move expenses like groceries, gas, etc. over to your credit card. If you want to go that route and earn more points or cashback you certainly can. Make sure you are accounting for that shift in spending from your bank account over to your credit card because you have now created a new "max" credit card bill.


After you have put in the work to ensure you have the right balance between what you put on your credit card and what you can afford to put on your credit card you are ready for the fun part of earning credit card rewards!



Determine your type of credit card reward

There are so many different types of credit card rewards out there and once you are in a place to take advantage of them it's like shopping for your favorite stuff. Do you want airline miles, maybe? Do you want cashback? That would be cool. How about savings on Amazon? Or points toward hotels? The list goes on and on.


The way I think about rewards is that they are the equivalent of getting a certain percent off the cost of something. To determine the value of the reward can be tough. If you have an airline rewards card for example they turn your purchases into points. You have to use your points to buy a ticket. So to back your way into the actual value you have to first determine the price of the ticket if you bought it with cash. Then determine how many points it costs you. Then determine how much you spent on your credit card to get those rewards. If you have to spend $100,000 to get a $100 plane ticket your rewards are worth 0.1% (terrible). If you spend $10,000 to get a $100 plane ticket we are up to 1% (not so terrible). If you spend $10,00 to get a $500 plane ticket you are up to 5% (this is a good reward).


As you build up more credit and stick with a certain credit card you get quite a few advantages. First, your credit score will continue to tick up. Your credit limit will also go up (be careful because your MAX expendable income may not have changed). You can also get a higher level of rewards. Most credit card companies offer different cards for those at various credit levels and with your hard work using and paying off your card ON TIME, you can work your way up to the best possible rewards.


I could give more advice here, but there really isn't a need. Check out the following articles to learn more about the types of rewards you can get and what makes sense for your lifestyle.


CNBC - rewards programs and how they work

Nerdwallet - best rewards credit cards of November 2020

Investopedia - best rewards credit cards

Money - best cashback credit cards


Summary

Credit cards can be a very valuable tool to build credit and earn rewards. Make sure you are in a good spot mentally and financially to utilize a credit card responsibly and the benefits you realize can be pretty great. As with any financial decision (and getting a credit card is certainly that) do your research, ask friends for advice, ask parents for advice, ask The Saving Dude for advice (though I'm not a financial advisor and don't claim to be one), and just make sure you are protecting your financial interests during the process.


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