Doing some proper research before getting a credit card has tons of benefits. Knowledge is power and knowing how to compare cards like an expert allows you to avoid making easy mistakes when weighing your credit card options. You don't want to waste money and hurt your score by choosing the wrong card for your needs, or one that will surprise you with high fees and rates six months down the line.
That's why it's so important to get it right and do your research upfront. Personally, I want cards I can earn perks from and that I can actually use. Some credit cards tout amazing cash back rewards front and center, but it's how you are able to redeem those rewards that needs to be scrutinized. I found this out once when the task of redeeming my rewards was as tedious as applying for a student loan!
Everyone benefits from comparing cards ahead of time.
If you're a student, comparing cards before signing on the dotted line allows you to choose the card best suited for your lifestyle and financial situation. For example, why pick the card that rewards you for entertainment purchases if you spend most of your money at bars and restaurants?
For the rising entrepreneur, you want a credit card to grow your small business. But while business cards have potentially huge payoffs, they also come with unique risks, like employees charging their personal expenses and limited consumer protections. Choosing the right card helps you anticipate these risks and, in turn, maximize profit.
For the family financial planner, comparing cards correctly helps you avoid ending up with too much plastic in your wallet, and can even help you find a card that can teach your kids about managing their own finances.
At the end of the day, deliberate decisions upfront will bring you big benefits—to your credit history, credit card debt, and savings—in the future. Preventing mistakes when comparing credit cards isn't as obvious as it should be, but with the right information, you can feel less overwhelmed and confident with your next step.
Whether it be understanding the real fine print surround those flashy rewards and introductory offers, choosing the right credit limit, or deciding whether a student or business card is right for your situation—we've got answers!
Here is everything you need to avoid costly mistakes when comparing credit cards:
1. Common Mistakes
As soon as you delve into all the different deals out there, you'll see card companies promoting "unbelievable" rewards packages, "outrageous" intro APR rates, and "insanely low" annual fees. Keep the following principles in mind when sifting through all card companies' marketing tactics:
Alluring cash-back rewards are often more flash than cash. This applies especially to the younger crowd. Even if a card offers great cash back for spending money on entertainment or food, the best choice for you might actually be a card with a 0% intro APR on purchases. For example, such an introductory purchase APR will let you buy big-ticket items, like a new couch or flat-screen, with greater ease in the here and now.
But, we also know that striking the balance between cash back and 0% intro APR is different for everyone. This means that everyone (not just students) should reflect on their own spending habits and upcoming anticipated expenses before making their decision. For example, if you are younger, but you aren't anticipating any big purchases right away, a low intro APR on purchases may not matter as much to you.
Travel rewards cards can be great, but also debilitating. These kinds of cards can be highly attractive. But trust us: You want to be responsible with a travel rewards card. It's important to be realistic about potential travel rewards cards. How much will you really be traveling? Keep your eye out for high annual fees because they can be more than you bargain for.
As you read through her piece, ask yourself whether you'll efficiently accrue rewards and be able to redeem them frequently enough to avoid them from expiring or losing value.
Balance transfers are not a surefire way to reduce your debt. A balance transfer is when you move all or part of your debt from one lender to another lender.
Why do this?
Because it can save you money on interest repayments, helping you slow everything down and take stock of your credit card debt. Many people undervalue intro APR deals on balance transfers because they don't understand what they are and how much they can save you from seemingly insurmountable loads of debt.
At the same time, many people mistakenly believe a balance transfer could save their score. Before folks with loads of debt jump on the next 0% intro APR offer on balance transfers, ask yourself this:
In order to pay off the debt you want to transfer, what monthly rate would you have to meet before the 0% APR expires?
Credit limits aren't meant to be increased infinitely. It's better to start off with a card that you can manage than to overreach and ruin your credit. If you have limited or bad credit, take it easy and start off with a secured card.
- Credit lines available from $200 to $5,000! Super Low Fixed 9.99% interest rate on purchases - with no penalty rate!
- No minimum credit score requirements! We invite all credit types to apply! No processing or application fees!
- Helps strengthen your credit with responsible card use. Reports to three national bureaus
- Fast, easy application process. Choose your credit line and open your Personal Savings Deposit Account to secure your line.
A secured card does require a security deposit, but almost anyone can get one. So, if you're a student applying for your first credit card, for example, or someone who makes some mistakes and hurts your credit score, then a secured card will serve you best. Later on, when your credit improves, you can graduate on up to an unsecured card, which doesn't require a cash deposit.
Most credit cards out there are unsecured cards, which allow you to borrow more, but in turn can get you into more trouble if you haven't developed responsible credit card habits yet.
The moral of the story is: Don't punch above or below your credit weight.
2. Things to Consider
The above-mentioned mistakes are the most common ones, but the lesser-known ones (listed below) can be equally as harmful, often because people don't even know to look out for them.
Preset spending limits are not set in stone. People often misunderstand what these cards are. They don't mean that there is absolutely NO spending limit. All it means is that the credit limit varies all the time, which can make these cards a headache for folks new to the credit world. If you want a card with a higher limit, you'll have to work for it by steadily improving your credit, which takes time, but it's definitely doable if you're deliberate about it.
Student cards are meant for students. It might sound intuitive, but we see students too often applying for top-of-the-line credit cards that they neither will get approved for nor likely fit their specific needs.
- Great for building your credit if used responsibly.
- Receive 1% cash back on every purchase, pay on time and boost your cash back to 1.25% for that month.
- Choose your payment date.
- Gain access to a higher credit line after you make your first 5 monthly payments on time.
You can spend all day weighing your options, but if you're a college student or parent of a student and you don't investigate student credit cards then you're doing yourself a disservice. Thankfully, students can choose between cards tailored to their specific circumstances. Have lots of student loans? Spend a lot of money on online streaming services, like Netflix?
Then you'll probably want the Citi ThankYou Preferred Credit Card for College Students.
Business cards are not the obvious choice for your business. Some rising entrepreneurs make the mistake of thinking that a company card won't reflect on their own personal credit score. After all, it's called a COMPANY card, right?
Turns out this is false.
If your employees use your company card irresponsibly, the business owner is the one with his head on the chopping block. Your personal finances and company finances will be intimately intertwined when you're first starting your business—that's a given. But once the company is off the ground, it's best to avoid using personal loans or credit cards on your business.
That's not to say you shouldn't get a company card. Giving your responsible employees company cards can have tons of benefits—from simpler financing to tax write-offs and higher employee morale. Just make sure you set the ground rules before you hand over the plastic.
3. The Fine Print
The real fine print that comes along with any shiny new credit is essentially the instructions—the fees, rates, offers, and rewards that come attached. It's way more important than the card itself and also way more boring and complicated. Fortunately, we've compiled a checklist to help you get through all the fine print.
See how many of these you've checked off:
Do you know if the intro APR really applies to ALL transactions? It's important to remember all the acronyms and jargon, so let's review this one. APR stands for annual percentage rate, and it's the interest rate that you pay on your various credit card transactions. Typically, a credit card has one APR for purchases and another for balance transfers, so pay attention to which "stellar" APR the credit card company is offering, and whether that APR is the one that's helpful for your personal situation. Also, pay attention to when intro APRs expire.
There's nothing worse than thinking you're going to pay 0% APR on your purchase of a brand new dining room table, when in fact that special offer expired last month and you're hit with a huge interest bill.
Did you take a breath before jumping on that enticing cash advance? There are typically high hidden fees involved and you have to pay interest, usually at a higher rate than for regular purchases.
Plus most card companies don't give you a grace period on the interest of your cash advance so you start accumulating interest immediately. Instead, consider choosing a debit or prepaid card.
A debit card, for instance, is much more straightforward and doesn't carry the web of troubles that cash advances do while serving a similar function.
Have you hashed out ALL the details of that shiny travel reward programs?
We already discussed some general guidelines for who should and should not choose a travel rewards card. But travel rewards programs often fool folks who don't read the fine print. Here's a quick two-step checklist to help you consider whether a travel rewards card is the right choice for your wallet:
- Does your preferred airline have any "blackout dates," days that they don't allow customers to redeem travel points?
- Do you plan on using your travel rewards on trips with friends or family? Traveling with other people often makes finding advantageous rates on the same flight or at the same hotel difficult.
Do you pay off your entire balance every month? If you're under major financial duress, then you may feel like paying just the minimum on your next few credit card bills.
This is indeed an option, and if you're expecting that you'll only need to do it once, then go for it. But, in the medium- to long-run, paying only the minimum required amount will cause your debt to balloon.
4. Maximizing Your Card's Value
Now that you have the tools you need to compare cards and choose the one that's best for you, let's review steps for making the most out of the card you do pick.
Know the surprising ways you could destroy your credit. You may think that you understand all the really serious ways to screw up your credit, like taking on a loan you can't pay off or cosigning on one for a friend or acquaintance. But there are, unfortunately, lots of smaller more nefarious pitfalls out there. Here's a few to keep in mind:
- As crazy as it sounds, that gym membership that you thought you canceled but didn't could drag down your credit score without you knowing it.
- Unpaid library fines also can hurt your score, even if it's for a small amount.
- A swipe-happy employee who takes the company business card out for a spin every time he's out with a client.
A gym membership, set up for autopay, might make it so that you never actually see the bill.That could lead to forgetting about the membership entirely, say, when you move out of the area or something, and ending up paying for it for months on end for no good reason at all. Having an open account like that can end up costing you points on your credit score, which you could definitely need on something like a mortgage application!
The lesson here is that whenever a collections report appears on your credit report, your credit score could suffer, so pay attention to your bills and your credit report and when you see something, do something.
Fix your bad spending habits. By understanding the most destructive kinds of spending behavior and then using the following rules of thumb, you can drastically improve your spending habits. Reforming your spending behavior will give you relief right away as well as make things easier when that unexpected emergency strikes.
Use the five-finger formula to stay in control of your spending:
- Don't spend more than you make
- Don't pay off debt with more debt
- Avoid late payments and high-interest rates
- Use cash, not cards, when you can
- Don't buy stuff you don't need
Avoid late fees. These days, you can set recurring alerts on your smartphone or laptop to remind you when it's time to pay your bill.
If you're coordinating bill payments with your spouse, maybe set the digital reminder a few days before the payment is due because even being just one day late can result in fees as high as $35. But, if you do get hit with a late fee, don't freak out just yet because …
If you call the card company, they likely will forgive your late fee. Recent studies show that less than a third of credit card users use this simple tactic. And it's really too bad because when people do call they often succeed in getting a late payment forgiven. After understanding the statistics of this phenomenon, you will be compelled to try this tactic and share it with all your friends and colleagues.
Don't pay to "repair" your credit. This is another example of marketing trickery. The truth is, companies offering to "repair" your credit for a fee are preying on folks in a financial tough spot. If you want to improve your credit, fix your spending habits using the above-mentioned rules of thumb.
Read your monthly statements. This might seem like a no-brainer, but many people undervalue how simply reading your credit card statement every month benefits you in the long term. It'll help you avoid oversights and unnecessary spending. Plus, you might discover some information there that you didn't expect.
Don't impulsively sign up for a store card. Many companies, like Target and L.L. Bean, will present you with store credit card deals that look good at first but backfire later on. For instance, the store might offer you 10% off your purchases today if you sign up for their sponsored card right now. And this might tempt you, especially if you have a full cart. But, if you already have a couple credit card (or seven), you should probably think twice, because …
Two credit cards are generally enough.Though many families have half a dozen or more, the ideal number of credit cards is really just two, according to many experts.
Most credit card companies offer cards with annual fees, so the more cards you have, the more you're paying in annual fees. Folks planning on applying for a mortgage soon have extra reason to avoid accumulating extra cards. For instance, if you have a lot of credit cards with high credit limits, the lender might ask:
What if you ran all those credit cards up?
What would your debt-to-income ratio be?
Canceling a card you don't use might hurt your score. The reason being, one criterion that makes up your FICO credit score is your available credit. So, if you close a card and lower your available credit, it will ding your score relative to how many other cards and how much total debt you carry on them.
Here are some solid recommendations for when you absolutely must dump a card:
- Spread out closures over time so that your utilization doesn't spike.
- Keep your oldest account open to preserve credit history length.
- Keep cards with high limits open.
- Don't close down credit card accounts right before applying for a loan."
Sometimes more cards make sense. You've got to assess your own situation here, and then follow the advice of experts on the pros and cons of having a short stack of credit cards.
Generally, having more cards does lower your credit utilization ratio (in layman's terms, that's the amount of debt compared with your available lines of credit)—which usually makes up roughly one-third of your credit score. So, if you're planning on making a big financial move soon, like applying for a car loan or even a mortgage, lowering your credit utilization ratio could be a quick way to make those moves possible.
Compare, contrast, and then collect the savings
It's well worth it to put in the time now to collect the savings later. Unfortunately, credit cards companies don't always make a straightforward comparison between cards easy. Thankfully, with a little research and relatively small amount of effort, you can navigate the credit world like a pro. With the above under your belt, it's time to dive into your comparison research.
There are tons of cards out there, and a dozen ways card companies and experts organize them to better attract specific consumers.
Have you ever made a costly mistake with a credit card? Figured out a creative way to correct it and improve your credit history?
Please let us know in the comments below.