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How to choose a credit card wisely

The best new credit card for you might not be the best card for me. Here's how to choose the most rewarding new credit card for you based upon your spending habits and your credit score.

Whenever I go to a party and people find out what I do, I inevitably get a financial question or two.

“What do you think of this mutual fund?”

“My financial advisor is underperforming the S&P 500. Should I fire him?”

And, quite often: “How do I choose a new credit card?”

Although this site — and many others — provide useful lists of recommended credit cards in tables that allow you to easily compare different credit cards’ rewards programs and interest rates, choosing one is still intimidating.

Choosing a new credit card is something most of us only do every few years. For one, applying for a card involves a hard inquiry on your credit report (too many of these in a short period of time aren’t good). And besides, you just don’t want more open accounts in your name than you need — for security and simplicity.

Here’s what to look for when choosing a new credit card. It’s not rocket science, but these tips will help steer you towards the cards best-suited to your creditworthiness and spending habits.

1. How’s your credit?

The best credit cards require really good credit. Certainly if you’ve had past credit problems, these cards might be off the table. But sometimes you might find yourself declined for a credit card even when you’ve been making payments on-time religiously, but you just haven’t had credit long enough.

If you have less than 5 years of credit history, you’ll have to lower your expectations of what you’ll get in terms of rewards, and you might also prepare to pay an annual fee. You can read more about choosing a credit card when you have limited credit here.

If your credit is top-notch, that’s great. But before you move on, keep in mind that some people are declined for credit cards even with good credit. Factors like having too much debt or not enough income can prevent you from getting a new credit card, even with good credit.

2. Do you pay off your entire credit card balance each and every month?

No judging here, but be honest with yourself.

  • Do you religiously pay every penny of your credit card balance every month?
  • Or do you sometimes use your credit card to pay off a big-ticket item or an over budget month over several months?

If you carry a balance—even sometimes—look at APRs first, then rewards.

This question matters. Because no matter how good the rewards on a credit card, you may save a lot more money by choosing a card with a lower interest rate, even if it doesn’t have rewards at all. If you carry a balance from time to time, look for the lowest APR first.

If you can, always use a credit card with a 0% intro APR to make big purchases that you’re going to pay off over time. If you can repay the balance before the intro APR expires, you won’t pay a cent in interest—and you might even come out ahead with rewards or if there’s a credit card sign-up bonus.

If you’re looking to transfer a balance from one card to a new credit card with a promotional 0% APR, don’t forget to think about balance transfer fees. Use our balance transfer calculator to see how much you might save.

IGNORE the rewards. Even if you only carry a balance occasionally, the interest you pay matters more than whatever rewards you earn.

Or, carry two cards.

If you want to be as savvy as possible, carry two credit cards: One with a low APR that you use for purchases you’ll pay off over time, another credit card that pays cash back that you pay off in full every month.

If you never carry a balance, then you can essentially ignore the interest rates when shopping for a credit card. If, however, something changes in the future and you’ll need to pay something off over time, you’ll want to get another new credit card just for that purpose. Don’t get caught paying a big APR on a rewards credit card!

3. Do you spend a lot of money in a particular area?

For most, one of these recommended credit cards will offer everything you need to earn rewards on everything you buy that can be redeemed for either cash or travel.

  • Here’s what to pay attention to when choosing a new credit card:
  • How are rewards earned? (Most will reward every purchase, with bonus rewards on certain purchases.)
  • How can rewards be redeemed?
  • Are their limits to the rewards you can earn? Do they expire?
  • Is their an annual fee? If so, do you spend enough to make the fee worthwhile?

Air travel is the most common reason to deviate from popular all-inclusive rewards cards. If you frequently fly a particular airline, the perks that come with having that airline’s loyalty credit cards — such as free checked bags or priority boarding — may be well worth the card’s annual fee. Keep in mind, however, that you may still get a higher rewards rate on most of your purchases with another card.

4. Do you need a credit card for your business?

If you work for yourself or run a small business, it’s imperative to separate business expenses from personal ones. A dedicated credit card can help.

This doesn’t have to be a business credit card — especially if you’re a solopreneur or you simply charge expenses and are reimbursed by your employer. Although the best credit cards for self-employed contractors happen to be business cards, using a consumer card is fine as long as you only use it for deductible business expenses.

Business credit cards like these, however, come with additional features designed to help you track business expenses and give employees access to credit cards. And the rewards on these cards can be quite good. To apply, you’ll need to have excellent personal credit as well as an established business entity.

Things to pay attention to when choosing a business credit card:

  • What features, if any, does it offer to help you run your business?
  • Does the card charge for additional employee credit cards?
  • Are rewards comparable or better than what you could get from a personal credit card?
  • If you’ll use the card to pay off business purchases over time, is the APR competitive?

Final points on how to choose a credit card

These days, most popular credit cards — like all of the ones we recommend — are fair and competitive. For example, if you choose a rewards credit card, you’ll earn, on average, 1.5% back in cash or travel rewards on your annual purchases. You can find cards that can increase that to 2%, either by paying an annual fee or choosing a card that rewards a particular kind of spending. Whether you want to obsess about a decision that may make you an extra $100 or less a year, however, is up to you.

The most important things to remember when you choose a credit card are:

Understand how your credit score impacts your chance of approval.

If your credit isn’t excellent, don’t apply for multiple cards that will turn you down. Doing so will only hurt your credit further. Look for a credit card designed for people with fair credit, or simply wait until your credit score improves.

Choose a low APR or rewards, not both.

If you need to transfer a balance or pay off a new purchase over time, that’s fine. Find a credit card with the lowest regular APR you can get and forget about rewards. When you’re sure that you will pay off your balance each and every month, then you can switch to a rewards credit card because you won’t care if it has a higher interest rate.

» MORE: Compare Money Under 30’s recommended credit cards here.

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