From cash back to miles earned, credit cards can be very rewarding.
I grew up in Japan, which is a very cash-based society, and I remember wondering when I was younger why people ever got credit cards. The only things I had heard were to not use the piece of plastic like a magic card, that credit cards made it easy to go into debt, or to budget out your daily spending by cash and to carry that amount in your wallet so that you can never go over budget. To be fair to my younger self…none of those things are false. Credit cards definitely can be a very slippery and steep slope into debt, and if you are struggling with sticking to a budget, forcing yourself to carry and spend your allowance in cash every day can keep you from overspending.
But the problem with that is…you miss out on rewards! Travel rewards are probably the ones we hear about most often, but there are other benefits you can get from credit cards as well. There’s a lot you can do to maximize credit card points but it all starts with finding the best credit card for you.
Step One: What’s your credit score?
Before you start looking at what credit cards are available to you, you need to figure out what your credit score is. You can get a free copy of your credit report at annualcreditreport.com. Applying for a credit card results in a hard inquiry which can negatively impact your score, so you want to make sure that you’re applying for a card that isn’t out of reach, credit-score wise, and avoid applying for too many credit cards in a short period of time. If you want to learn more about what goes into your credit score or need tips on improving your credit, check out “What’s Your Credit Score?”
If you’re a student still building credit, a good option would be the credit cards made specifically for students. For example, Discover and Capital One have credit cards with cashback rewards that are geared towards students that are still working on building their credit.
Or, if you have bad credit that you’re working on rebuilding, you can look into what’s called a secured credit card. This is different from a debit card, but it’s secured because you make a cash deposit with the credit card issuer, which you wouldn’t normally do with a credit card. Then, the issuer of the secured card can share your activity, like monthly payment history, with the major credit bureaus which can help you rebuild your credit. Some deposits do earn interest while others don’t, and the amount of deposit required can vary as well. For example, Capital One’s Secured Mastercard offers a $200 initial credit limit after a $49 initial deposit, with credit limits increasing based on how much your deposit is. Keep in mind that these secured cards might have an annual fee and tend to have higher APRs, or annual percentage rates, so you only want to go this route if you really need to.
Next, figure out what you want to use this credit card for. Are you looking to transfer balance from an existing, high interest card to help pay down your credit card debt? Do you have a big expense coming up that you need to finance? Maybe you just want to get travel points for general spending, or get rewards for expenses from your side hustle.
If you’re transferring a balance from another high interest card or have a big expense that you need to finance, you’ll want to apply for a 0% APR card. This means that you’ll pay zero interest during the introductory period, which is usually between 12 to 18 months. As long as you pay off your balance before that period ends (and the regular APR kicks in), you could save hundreds – or even thousands! – of dollars on interest and ease the burden of having to pay off your purchase in one fell swoop. Some cards offer 0% only on balance transfers, some only on purchases, and others on both, so make sure to do your research on what the 0% APR applies to and in what time frame before you apply.
If you’re looking to get rewarded for general spending and are able to pay off your balance in full every month, a rewards credit card is a good match! These do tend to have higher APRs, but usually offer sign up bonuses and can offer rewards like cashback or other points and miles on every dollar you spend. For example, if you’re looking to save money, a cashback card could help you do that by rewarding you with, as the name implies, cash back into your account for every dollar you spend. The best cash back card for you also depends on your spending and what you value most. There are cards that have high earnings on dining, others that reward grocery spending, or some, like the Bank of America Cash Rewards credit card, which allows you to choose which category you want to get 3% back on each month.
When applying for a credit card, make sure to look at the key terms and conditions (such as APR and annual fees) and make sure you keep credit utilization to under 30%! This way, you can reap the rewards without damaging your credit score.
If your goal is to save money on travel, then there’s plenty of travel rewards cards to choose from as well! When looking at these options, be sure to keep in mind what your travel goals are. For example, if you want to book a trip to Europe, a Southwest credit card won’t be able to help you do that. If you’re loyal to a specific airline, look into credit cards that you can redeem points and miles for within that airline’s alliances. Travel focused cards can also help you save money on hotel stays, and can come with additional benefits like travel insurance protection and lounge access at airports as well – if you’re a frequent traveler, you know how crucial it is to have that lounge access.
If you have a side hustle, you can earn rewards for business expenses if you qualify for a small business credit card. You don’t need to be a massive corporation to be qualified for one! These business cards can also offer rewards in areas like office supplies or internet services that personal cards might not come with. And, there’s the added bonus of keeping your personal and business expenses separate for when tax season comes around.
Lastly, before applying for the card, make sure to look at the key terms and fees. This includes the APR, or the interest rate you’ll pay if you carry a balance, what the minimum payments are, other fees – like balance transfer fees, late fees, or a foreign transaction fee if you use the card while traveling, or fees for cash advances, and annual fees.
Not all credit cards have annual fees, although credit cards that come with rewards and perks usually do. Sometimes this annual fee is waived in the first year, and then it’s usually charged to your account annually. If the card you want has an annual fee, compare that card to similar ones from other issuers to make sure you’re getting a good deal and that all of the benefits of the cards outweigh the cost of the fee. This means looking at potential sign-up bonuses, the interest you’ll pay if you think you’ll be carrying a balance on the card, the rewards – whether it’s cashback or miles per dollar spent, and additional perks like advance access to event tickets or roadside assistance.
If you get a card with an annual fee and decide it’s not worth it after using it for a fee, you can close the account but this could negatively impact your credit score. Instead, you can see if you can switch to a no-fee card with the same issuer, or even call and ask if they will waive the annual fee. Issuers might do away with your annual fee depending on how much you charge on your card each year, your payment history, and length of time as a customer.
Before we wrap this up, I want to emphasize that you should always have a plan before applying for a credit card! Whether you’re getting a card to rebuild your credit or get rewarded for spending, remember that it’s important to make your payments on time and keep your credit utilization to under 30% (meaning, spending up to $300 if you have a total credit limit of $1000) in order to prevent your credit score from decreasing. This isn’t a magical card that you can ignore your budget and overspend on! As I’ve talked about in previous episodes, credit card debt can become very expensive, VERY quickly, so if you are planning on carrying a balance, make sure you have a plan to pay it off before going into debt.
I hope you found this helpful if you’re in the market for a new credit card. There are a lot of credit cards with great perks to reward our everyday spending, and finding the right credit card for you is key to making money moves!
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