Credit cards. Most of us have them. Even if we don’t, most aspire to get multiple.
This is because they allow consumers to have higher spending power than their income.
According to the Experian State of Credit Report, the average American has at least three credit cards and an outstanding balance of $6354. In the US alone, there are over 1.5 billion active credit cards. As per a study conducted by McKinsey, credit card usage doubled in 2018.
Forty-eight percent of credit card transactions pertain to online shopping, while 44 percent of consumers prefer using credit cards over other modes of payment.
One thing is for certain-credit cards are widely used by the masses. It is natural for those who don’t have one to consider getting it. Are you one of those individual who so want to get it?
If so, don’t go into the decision blindly. Instead, there are 5 factors you must analyse before you choose your credit card. Here is how you should go about it!
1. Your spending habits
Consumers spent over $14.67 trillion by 2019’s third quarter as per the Bureau of Economic Analysis report. In other words, 68 percent of the US economy this year was made of consumer spending.
While on average, consumers utilize 30 percent of their card limit, with Gen Z using 37 percent and Baby Boomer, 28 percent, respectively, spending habits of consumers can vary from one person to another.
Therefore, while statistics may help you in finding out about which credit card is best for an average consumer, to know which the best credit card is for you, you need to understand your spending habits.
Avoid major credit card blunders like getting a high limit card when you don’t need one. Do so by gauging your purpose for getting the card. What will you use it for? Will you only conduct online shopping via it or keep it in case of emergencies?
Your spending habits will help you decide which credit card is suitable for you. For instance, if you wish to use your credit card to pay monthly utility bills conveniently, interest rates won’t matter to you. The same will be the case if you don’t have a habit of carrying an outstanding balance.
On the other hand, if you wish for your credit card to be a go-to-payment method, then you should look for an option that has a high credit limit as well as a sound reward program.
2. Applicable interest rate
According to CreditCard.com, the average percentage rate (APR), or interest rate, is 17.27 percent. However, this doesn’t mean that you will always be offered this rate, regardless of which credit card you opt for.
The interest rate offered to you depends on which bank you opt for and the type of rate provided. For instance, you can choose between variable and fixed rates. While fixed-rate lets you know about your monthly interest expense, variable rates tend to fluctuate.
Fluctuations depend on various factors, including credit limit, whether or not you pay your outstanding balance on time and how much you go over the limit. These alterations in the rates will not occur monthly, but you will be notified of the occasional changes from time to time.
3. Credit Limit
With every passing year, the total accumulated credit card debt is increasing. This is because to keep up with the spending in today’s time; many find themselves opting for credit cards with a high limit, which they then have to pay off.
The credit limit is an essential factor to consider when selecting the perfect credit card for you. Credit limit refers to the amount of money the issuer of the credit card allows you to borrow. Now, this will depend on your credit history as well.
For instance, if you are known to default on your debt payments, you won’t get a high credit limit. Also, understand that the closer you get to your credit limit, the higher the negative impact on your credit score will be. So, always aim for a limit that you can safely stay within.
Before you begin looking up how to activate cash cards, choose the right card with an optimum credit limit.
4. Annual Fee
In the case of some issuers, you are required to pay a yearly service fee for the possession of a given credit card. Other issuers don’t charge the fee at all. Logically, you might think that the credit card that demands no annual fees is the one for you.
However, sometimes, you need to analyze annual fees much more closely. Rather than looking at it as an expense that can be avoided, see what return you are getting in exchange for the cost. For instance, some issuers offer great rewards and perks as part of their package.
The benefits delivered by the credit card service can make the annual fee worth it. So, don’t discount any credit card before analyzing each benefit that it offers.
Service charges aren’t the only way credit card issuers make money off you. There are also penalties charged in case you pay your credit card bill late, or if you exceed your credit limit.
Apart from annual and service charges, make sure you consider the penalties as well. While you may think that you won’t ever break the rules, it is always a good idea to consider the possibility of such a scenario upfront.
Compare how much penalty is charged by different credit card issuers. Here, your goal should be to opt for a credit card with the lowest penalties. However, make sure this doesn’t come at the expense of a high-interest rate, low credit card limit, or a high annual fee.
It is essential to consider each of the five factors. You need to strike a balance between them all. Prioritize the factors which are more relevant to you. Compare different packages. Choose whichever feels the best for you.
Once you do so, you can begin spending away on the various luxuries and necessities of life!