Finding the right credit card can seem like a daunting task because there are so many to choose from. They all have slightly different terms, interest rates, sign-up bonuses, rewards for specific types of spending, annual fees (or no fees), and other fine print.
Knowing how to choose the right credit card among all the existing options may not seem an easy task. Don’t be discouraged, though!. Here are 4 steps to help you choose easily and safely.
Having a credit card in your wallet can be incredibly convenient. Know the risks and benefits of this instrument and choose the best option for you.
1. Understand how a credit card works
Let’s first clarify how a credit card works. A financial institution, such as a bank, grants us credit to buy goods or services, typically accessed through a plastic card. This card has a specific limit, and the main card networks, such as Visa, MasterCard, American Express, etc., process the transactions.
You can pay the loan in full on the first due date of the following month, or monthly in partial payments until you pay the entire balance in full.
2. Know the different types of credit card
There are several types of cards to choose from. Each of them usually has one or several of the following characteristics combined, thus forming many possibilities.
Interest rate (APR)
All purchases we make with the card have an interest called Annual Percentage Rate. This is also known as the purchase APR or interest rate. The APR includes any type of transaction fees or charges. It is the interest charged for making purchases with the card.
Also, be aware of the penalty APR that may apply if you pay late, miss a payment, or go over your credit limit. Some cards also offer an introductory APR that only applies for a set time.
Some cards charge a fee each year that can vary depending on the issuer and the extra benefits you receive. The annual fee is a one-time payment you must make each year.
Financial advisors recommend that you avoid these charges as they increase your costs and reduce your credit capacity.
Insured and uninsured cards
Secured cards, also known as secured credit cards, require you to make a refundable deposit to the card before using it.
The deposit will work as your credit limit. However, if you do not make your payments, the institution will use the deposit to pay your debts and will not return it to you. Generally, this product is for people with a bad credit history or for beginners who have no history.
On the other hand, unsecured cards do not require a guaranteed deposit. As a result, they are usually an excellent option for people who want to boost their credit or who already have a good score. Find out if you can switch from a secured card to a unsecured card after a trial period.
Some rewards cards focus on travel, providing a point or mile for every dollar you spend, which can be redeemed for free flights or hotel stays. Other credit cards may offer auto insurance policies or cover you for loss or theft of a cell phone. º
These cards usually have higher interest rates.
Credit cards with cashback
There are many ways to get cashback, and credit cards are one. These cards provide cashback points for some or all of your purchases. Usually, you receive the money in a lump sum at the end of the year.
However, don’t think that rewards or cashback cards are better than traditional cards because, like rewards cards, these cards often have higher interest rates.
Try to read the fine print and understand all the terms and conditions of the card before applying for it. The better you understand how it works, the better you can use it responsibly.
3. Find a card that improves your credit score
If you have no credit history or your credit score is low, getting out of your situation can be challenging. There are countless success stories of people who have improved their credit history thanks to a credit card.
Why is it essential to have a good credit score?
It is crucial to have a good credit score because it is one of the primary sources of data that banks will use to determine if they should grant you credit (loans, mortgages, credit cards, etc.)
The amount and interest rate of the credit to which you have access depends on your score. This means that if you have low credit scores, you will only be able to access very small or very expensive loans.
Over the life of a loan, even a slight interest rate difference can mean hundreds of dollars saved.
How to know your credit score
But before you start, you first need to know your score. Then, you can search online for companies that offer free credit reports. Most lenders consider a score below 580 to be bad.
How to increase your credit score
Most credit cards are one of the most used mechanisms in the financial world to improve credit over time. In fact, depending on how you use them and how you pay your charges, it can be a completely free way to increase your credit.
The correct use of credit cards is one of the easiest and fastest ways to build your credit history, as long as you use them responsibly. To do this, try to keep the use of your card below 30% of your credit limit and always pay your balance in full before the due date.
Remember, you can only improve your history if the credit card reports your payments to the credit bureaus (and this will only help you if you make timely payments).
A credit card is a financial instrument. Therefore, you must know what you are going to use the card for and how to choose the card that best suits your needs. Let’s see some user profiles as examples and the characteristics of each.
4. Define how you will use your card
The ideal card is one that best suits the purpose for which you need to use it. Let’s see the characteristics of the recommended cards according to each profile.
Impulsive Buyer Profile
If you cannot contain yourself and always charge your card to its limit:
• Ask for a card with a limit that is not very high, so you do not overuse it.
• Avoid having more than one card.
If you make most of your purchases in monthly payments, paying as little as possible per month, the best card for you will be one that has the following characteristics:
• Try to get a card with the lowest interest rate (PCR)
• Avoid cards with additional bonuses as they have a higher PCR.
Many people use their credit cards in this way, and the result is that they enter a vicious circle wherein a large part of their payments goes on interest on the cards.
Organized and self-controlled buyer profile
Obviously, this profile makes the wisest and most rational use of the card. If you buy almost everything with a debit card and the credit card is only used for an emergency or to increase your credit score, and if you can use the card for no more than 30% of its limit.
• You can have cards with the highest limit
• You can have more than one card.
If you pay all purchases in one installment.
• Prioritize cards that do not have annual expenses before a low PCR.
If you are unsure of how you will use your card, it is best to start with a traditional credit card for general use with a low limit and the lowest PCR you can get.
Credit cards can be a source of joy or sadness in your life. That is why it is crucial to learn how to choose the right credit card and use it correctly. So, enjoy this valuable instrument and ally in your financial goals.