In today’s world, credit cards are considered an everyday part of our lives. In fact, according to American Bankers Association research, there will be around 31 billion credit and debit cards in circulation by 2029. As they are so popular, it is understandable why the marketplace is filled with countless credit card options. While this can make it possible to find the perfect credit card for you, the sheer number of options can make choosing the right card a little tricky. But, it is always important to choose the best credit card for your spending habits. Fortunately, when you’re armed with some basic knowledge, it can make the decision far easier.
The Role of Your Credit Score
Before we can start to delve into the different credit card types and options, it is important to understand how your credit score can influence your credit card choices. Many credit card issuers restrict card availability to those with certain credit scores. If you have an excellent score, you are likely to have access to practically any credit card in the marketplace, but if your score is poor, you will have extremely limited options.
This means that before you can start to shop for cards and send in applications, you need to know your current credit score. Unfortunately, we don’t just have one credit score.
There are three major credit bureaus and a number of credit agencies, which all use a different credit scoring model. The credit scoring models use a variety of factors to calculate a three digit score. The higher the number, the better your score. The factors considered include your income to debt ratio, the length of your credit history and your credit utilization ratio. The latter is calculated as the amount of credit you’re using as a percentage of your total credit limits.
This can be a little confusing, but once you understand that all of your outstanding balances are considered together with your total credit limit, it is easier to understand. For example, if you have four credit cards with a total credit limit of $20,000 and you have a combined outstanding balance of $10,000, you have a credit utilization of 50%.
The importance of each of these factors varies according to the credit score models, but making even minor improvements, such as keeping your credit utilization below 30% can have a significant impact on your score.
Which credit score is used will depend on the credit card issuer. FICO is considered an industry standard and has a score range of 300 to 850. But, you’ll need a score of over 670 to be considered to have good or excellent credit. However, some companies use VantageScore, which requires a score of over 600 to be good.
Fortunately, there are several ways that you can access your latest credit scores. Some budgeting or banking apps provide free access, but you can also obtain a free copy of your credit report each year if you apply to the major bureaus directly.
The Types of Credit Cards
After you know whether you have great or less than ideal credit, you can start to narrow down your credit card options. However, you will need to understand that there are different types of credit cards and which one works best for you will depend on your spending habits. There are several categories of credit cards.
Types of Credit Cards at a Glance
| Credit Card Type | Best For | Key Benefits | Potential Drawbacks |
|---|---|---|---|
| Rewards Credit Cards | Frequent spenders who want points, miles, or perks | Earn rewards on purchases, often with sign-up bonuses | High interest rates if balance isn’t paid in full |
| Cash Back Credit Cards | Everyday purchases with simple rewards | Straightforward cash rewards on spending | Some have category restrictions or spending limits |
| Balance Transfer Cards | Paying off existing credit card debt | Low or 0% APR introductory periods on balance transfers | Balance transfer fees; rates increase after promo ends |
| Secured Credit Cards | Individuals building or rebuilding credit | Requires a refundable deposit, helps establish credit | Limited credit line based on deposit |
| Travel Credit Cards | Frequent travelers | Travel perks, airline miles, no foreign transaction fees | Often have annual fees and may require good credit |
| Low-Interest Credit Cards | Carrying a balance month-to-month | Lower interest rates than standard cards | Fewer rewards or perks than premium cards |
| Student Credit Cards | College students with limited credit history | Helps build credit with lower credit requirements | Lower credit limits and potential for high APR |
| Business Credit Cards | Small business owners | Helps track business expenses, offers business rewards | May require a personal guarantee |
| Store Credit Cards | Frequent shoppers at specific stores | Exclusive discounts and rewards at partnered retailers | High interest rates and limited usability |
Rewards
A rewards credit card offers points or miles as a reward for your spending. Most cards offer a set number of miles or points for each dollar you spend with the card. However, many cards also have bonus categories, which allow you to earn a higher rate. This can be a special offer bonus, such as spending on gas and groceries offering extra points, or the card could have a tiered reward structure all year round.
For example, you could earn five points for each dollar on travel purchases, three for gas and groceries and one for all other spending.
Some cards have a set tiered structure, but there are others that allow you to designate which categories you want to have the highest rewards. This can be very helpful if you tend to have regular spending patterns and know that you’re likely to spend the most within a certain category throughout the year.
You can typically convert accumulated points into cash that you can transfer into a designated bank account or apply to your credit card balance. You may also use points towards travel purchases or experiences through the credit card issuer’s portal.
If you have a credit card offering miles, they will be tied to a particular airline program. This means that you link your rewards program to your credit card and can move the accumulated miles across as and when you like for your travel plans.
Cashback
This is a simplified form of rewards credit card. It works in a very similar way, but rather than earning points or miles, you’ll get a set amount of cashback on your credit card spending. Most cards have a simple percentage reward structure, meaning you will get 1 to 5% for every dollar that you spend.
As with the points or miles cards, many credit card issuers have a tiered cashback structure, so you earn a higher percentage of cashback for spending in specific categories. But, some cards simply offer a fixed amount of cashback, regardless of the spending category.
You can collect the cashback in your credit card account and then transfer the accumulated amount into your bank account or apply it to your credit card balance.
Balance Transfer
As its name suggests, the balance transfer card is specifically designed for transferring a balance from other credit cards. This type of card often offers a 0% or low APR for a set amount of time. So, you could have up to two years at 0% APR to pay down your outstanding balance without paying any interest.
Once the promotional period ends, your APR will revert to the standard rate and you will start to accrue interest on any remaining balance. This means that if you haven’t paid off the balance in full, you could end up paying a higher rate without earning any additional benefits.
Secured
This type of card tends to be one of the only options for those with poor credit or who are struggling to qualify for a standard credit card. As its name suggests, a secured credit card requires you to provide “security” for the account. This is usually a cash deposit that is held by the credit card issuer with the reassurance that if you default on paying the credit card bill, they can use this money to recoup any losses.
Many card issuers calculate the limit for a secured card from the amount of deposit. So, if you paid a $500 deposit, you would have a $500 card limit. But, there are some cards that work a little differently and will provide a larger limit even if you only deposit $200.
These cards can seem a little counterintuitive. After all, if you have the money for a card deposit, why would you not use this to buy what you want? But, having this type of card can help you to build or rebuild your credit. You can use the card to make purchases and then when you pay the bill on time each month, it will be logged with the major credit bureaus.
Additionally, some card issuers will review your secured card activity and provide the option to upgrade to a regular credit card after an amount of time. Once you have shown that you’re a responsible credit card holder, you could transition to a regular credit card and your deposit will be returned.
The Concept of Revolving Debt
Another important thing that we need to cover before we continue exploring how to find a card to suit your spending habits is the concept of revolving debt.
There are two main types of debt; installment and revolving. Installment debt is the type of account where you make payments of a set amount each month for a specified amount of time. For example, you may take out an auto loan and need to pay $300 a month for 36 months. At the end of the 36 months, if you’ve made all your payments on time, the account balance will be cleared and the loan agreement is fulfilled.
Revolving debt works differently. Instead of receiving a set amount, you will have an agreed credit limit. You can then spend as much or as little as you like on the account up to your agreed limit. There are no set monthly repayments and instead the minimum amount due on the account is calculated according to the amount of interest accrued and the current balance. This is typically approximately 5% of your outstanding balance.
However, if you only pay the minimum amount due when your bill arrives, most of this payment will cover the interest charges. So, very little will be paid off your outstanding balance. Over time, even a modest balance can take months or even years to clear, particularly if you continue to use the card.
Essentially, the debt is just revolving each month, with new interest charges added each month and your payments are deducted. But, you are free to pay any amount when your bill arrives, providing it is more than the minimum amount due. In fact, if you clear the balance in full, you would incur any interest charges on your account.
Choosing the Right Card for Your Spending Habits
Now, we can get down to choosing the card that is best suited to your preferences and habits. Since everyone’s circumstances are unique, there are a number of things that you’ll need to consider.
Your Typical Spending Patterns
Before you start shopping for credit cards, you need to take a few moments to think about why you need a new card and how you will use it. Are you looking for a card for everyday spending or are you planning a large purchase? Do you tend to shop at the same places each month? Do you have particular areas of spending?
Take a little time to look at your bank statements and budget to work out where you typically spend the most money. If one of your largest expenses each year is gas and groceries, you would benefit from a rewards card that offers this as a bonus or high tier category. On the other hand, if you love to travel and tend to spend the most on flights, rental cars and other travel related expenses, a travel rewards card would suit your habits.
If you don’t have any typical spending patterns, a basic rate rewards card is likely to be a good option for you. You won’t need to worry about spending categories or bonus rewards, as you’ll get the same percentage of cashback or points on every dollar you spend with your card.
For those who are planning a large purchase, a balance transfer card could be a good option. Many balance transfer cards allow you to benefit from the promotional rate on purchases within a set period. This means that you could spread the cost of your purchase over the promotional period and minimize the interest charges. Just remember that you’ll need to ensure that the balance is paid in full before your promotional APR ends.
The Value of Card Perks
One of the main reasons to consider a new credit card is the perks. These days, there are card issuers offering a whole host of benefits for cardholders from free subscriptions to travel benefits. However, it is important that you don’t get dazzled by the perks package and you choose a card that offers good value for you.
Ideally, your new card should not require you to change your regular spending habits to access the benefits. If you need to spend more or change where you spend money, that freebie could end up costing you money.
You also need to assess the real world value of the perks for you. Most cards offering great perk packages have an annual fee. This fee is applied to your account each year, regardless of whether you’ve used your card and if you don’t pay it in full, you’ll start to accrue interest on this charge.
While a long list of perks can be enticing, you need to think about whether you would actually use them. For example, many travel cards offer free travel insurance, free checked bags, and even perks like lounge access. But, if the card has a $250 annual fee and you only travel once a year, it may actually work out better to pay for these perks yourself.
Credit Boosting
If you need to build or rebuild your credit, a credit card could help you. This is a good option for modest spenders who can be disciplined with their card use. Your new credit card options will be determined by your credit.
If you have good credit, you should be able to qualify for a card that offers some perks or rewards. You can use the card to make a few purchases each month and clear the balance when the bill arrives. This will allow your activity to be logged with the major credit bureaus to improve your credit history. Just be sure to keep an eye on your credit utilization ratio. A new credit card will provide you with more available credit, but you need to try to keep your overall ratio at below 30%.
If your credit is not great, a secured credit card could help. You can make modest purchases and clear the bill each month. Be sure to choose a card that reports your activity to all three of the major credit bureaus for maximum impact on your credit scores.
Read the Fine Print
Finally, be sure to read through the full terms and conditions before you sign the credit card agreement. Many people skip this step as they don’t like to read pages of boring information, but it is crucial. The terms and conditions will provide you with all the pertinent details for the account including the annual fee, the APR and what charges apply if you transfer a balance, use the card outside the US or make a cash advance. These fees are often only a small percentage, but can quickly add up.
If you regularly travel and intend on using your card outside the US, even a modest 3% foreign transaction fee could result in hundreds of dollars in charges per year. So, in this scenario, you should choose a card that has no foreign transaction fees, even if you have to compromise on other rewards.
Getting a new credit card can be pretty exciting as it can offer a gateway to your financial plans, but it is important to remember that the card needs to complement your typical spending patterns. Be honest with yourself about how you will use the card and read through all the product information carefully, as it could end up being highly beneficial in the months and years to come.
