Are You Using the Best Credit Card? Here's How to Tell
You found a good credit card deal, signed up, and have been using the same one for years—now what? If you've been swiping the same piece of plastic without thought, Nerdwallet's credit card expert Sean McQuay says you could be making a big financial mistake. "There are two very different mentalities. There’s a type of person who has a card and never thinks about it. Then there are the people who have been exposed to the world of credit card rewards and think of it as a tool to optimize their finances." Unfortunately, many Americans fall into the former group.
It seems credit card fatigue is widespread among millennials. A 2015 study revealed 31% have no idea how much their current card is costing them in fees and that almost half admit to choosing a card based on an advertisement. If you don't know your fee record, settled on an easy deal, or have simply been using the same card for over a year, it's time to get back on track. Ask yourself these four financial questions to find the best credit card to suit your lifestyle.
Before you start browsing credit card comparison sites, there's one thing you need to know first: your credit score. That might seem like a no-brainer but a 2015 Bankrate survey found that less than half of Americans have checked their score in the last year. "It's hugely important. I can't overstate that enough," says McQuay.
Less than 690: A low credit score is a reality for many millennials with the average score sitting at 625. "It’s a really unfortunate scenario because the people who need those cards the most can’t get them," he explains. It's not all doom and gloom, though. Make sure you refine your search to cards within your reach. "The issuers don’t make it very obvious but they’ve told NerdWallet what the qualifying credit scores are so you can narrow your search."
Over 690: Good news: Your solid credit score puts you in a great position to get a better deal. "Most of the good credit cards require a score of at least 690," he explains. If your score is high and you've had your card for more than a year, it's the perfect time to search for a new credit card.
More credit cards doesn't necessarily equate to more debt, says McQuay. In fact, he points out that there's a real benefit to having multiple cards that align with different spending habits, and that it can help you earn better rewards and build a strong credit score.
Less than three: Credit card avoidance is a serious issue and could do you a huge financial disservice in the long run. A recent Bankrate study found that an alarming 67% of millennials don't have credit cards, which could prevent you from developing the credit score needed to receive approval on a loan. McQuay believes the perfect number of credit cards is at least three, so if you don't fall into this category it might be the perfect time to add a new card to your wallet.
Three or more: "Too many cards in my mind is the number you can't actively manage," he says. "I recommend three: one that optimizes the category you spend a lot of money on, such as groceries or gas; a second card for your favorite store such as Amazon or Target; and a third that optimizes everything else, like the Citi Double Cash Card, which offers 2% cash back on every purchase, regardless of category."
He also notes that not every card in your wallet needs to be regularly used. "One metric that goes into measuring your credit score is how old [your credit card] is, so there’s a benefit for keeping cards open even if you’re not using them," he explains. Just make sure you're not being charged fees and use the card once a year so it doesn't get closed.
To find the best deal for your lifestyle, it's vital to take a look at your spending habits. McQuay says there are generally two kinds of credit card users, "revolvers" who carry debt and revolve it on their card, and "transactors," who spend but always pay off their debt.
No: You're a transactor. Skip to the next question.
Yes: Focus on finding a credit card that charges low interest, rather than offers rewards. There are three main card categories you should explore:
- The short-term option: 0% APR credit cards are ideal for skirting fees for a set period (usually a year) but you'll need to mark the date in your diary and look into changing cards before the fee period starts, to fully optimize the card.
- The long-term option: Low ongoing APR credit cards are perfect for those who don't plan to pay off debt in the near future. "Check local credit union deals first," says McQuay. "They're often better than big banks."
- The intermediary option: If your 0% APR credit card is coming to the end of its no-fee period, a balance transfer card could be a good option. "This allows you to transfer the debt from one to another. The downside is they generally charge a fee," he says.
You live within your means and always manage to pay off credit card debt; according to McQuay, you're a transactor, so make it a priority to search for the best rewards to suit your lifestyle. There are three main card types that match different spending habits:
- The everyday spender: Cash back credit cards are great for normal daily transactions made at a variety of outlets. "This is a good no-stress option. It's simple and you don't have to worry about points," he says. These credit cards offer a percentage of cash back on purchases, and many optimize for regular expenses like gas or groceries.
- The jet-setter: If your schedule involves regular airline travel, a co-branded travel card could be for you. "This is perfect for business travelers who only fly with the same brand and want to maximize their perks, like upgrades," he explains. The downside? "The earning rates aren’t great and redemption options are very limited." In other words, it's really only worthwhile if you're a frequent flier with one travel provider.
- The varied spender: You travel on occasion and will likely use your credit card at a variety of stores. If that matches your lifestyle, then a general travel credit card is for you. "[They're] neither cashback or co-branded travel but somewhere in the middle," says McQuay, listing the Chase Sapphire card as a popular example. These cards often allow you to choose between cash back rewards or accumulating points. "It’s an excellent option for people who want travel rewards but don’t want limits."
Feeling a little more equipped to find your perfect credit card match? Let the search begin!