The promise of earning valuable perks from a credit card can be exciting. But choosing the best credit card to add to your wallet isn't always as easy as it seems.
There are many factors to weigh before you fill out an actual application. At the very least, you need to consider your spending habits, the types of rewards you value the most and the kind of credit card you're likely to qualify for at that moment.
Here's everything you need to know about how to choose a credit card.
Check your credit report
Step one to choosing the right credit card is checking your credit report from one of these three major credit agencies: Equifax, TransUnion or Experian. When you apply for a credit card, the condition of your credit will have considerable influence over whether you get approved or not. You can check all three credit reports for free once a week at AnnualCreditReport.com.
Be sure to go through each report in detail. Understand how your credit shapes up — good, bad or otherwise. It's also wise to check for errors and report them. Credit errors do happen, and they could unfairly lower your credit scores. If you discover errors, you can dispute them with the credit bureaus. The Consumer Financial Protection Bureau provides sample dispute letters that may help.
You can check your credit scores as well, even though the scores you find online will likely differ from those your lender sees. Credit card issuers have different minimum credit score requirements for different cards. So, if your credit score currently falls in the "fair" range, it's probably not wise to apply for a premium rewards card that requires excellent or good credit to qualify.
Related: 6 things to do to improve your credit score
Understand your spending habits
Next, you should look back and examine your spending habits. Do you spend a lot of money each month on groceries to feed a large family? Do you order takeout or dine out often?
With the right credit card strategy, you may be able to boost your reward-earning potential in different spending categories. For example, there are credit cards that offer extra rewards when you spend on certain categories:
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- Travel
- Dining
- Groceries
- Gas
- Entertainment
When you choose a credit card that offers higher rewards for frequent purchases, you can earn more points, miles or cash back (depending on the card type).
Let's look at dining as an example and imagine you spend an average of $1,000 per month on dining purchases. You could earn up to $20 per month (or $240 per year) with a 2% cash back card like the Citi Double Cash® Card (1% when you buy, plus 1% as you pay; see rates and fees).
Now, assume you place the same $1,000 in monthly dining purchases on the Chase Sapphire Reserve®. You would earn 3 points per dollar spent for a total of 3,000 Ultimate Rewards points each month (or 36,000 per year). Based on our valuation of Chase points of 2.05 cents per point, those 36,000 Ultimate Rewards points could be worth up to $738 in rewards — that's a lot more bang for your buck.
Related: These are the best credit cards for everyday spending
Research the different card types out there
Once you know your credit score and have identified your heavy spending categories, you can start sifting through credit card offers. From here, you should figure out which credit card features are the most appealing and how you plan to redeem your points.
For example, if you have a specific trip in mind and you know which airline you want to use, you may want to get a cobranded airline card or opt for a card that provides flexibility in transfer partners, like the Chase Sapphire Preferred® Card.
Here are some common types of credit cards to consider:
Cobranded airline and hotel credit cards
Cobranded airline and hotel credit cards are ideal for people loyal to a specific program but not enough to earn elite status. These cards offer benefits that can make your travels a little more comfortable.
With airline cards, you can expect free checked bags, discounts on inflight purchases, and possibly even progress toward elite status. On the other hand, hotel credit cards usually offer mid-tier status, resulting in perks like room upgrades, free breakfast and bonus points on paid stays.
Bank rewards cards
Bank rewards cards offer the ultimate flexibility in terms of redemptions because they accrue transferable currency points. These cards often offer generous bonuses in everyday spending categories.
When redeeming points, you can choose cash back or transfer points to airline and hotel transfers — making these rewards extremely versatile. If you opt for a premium bank rewards card, you can even take advantage of valuable perks like airport lounge access and annual travel credits.
Some of our favorite bank rewards cards include the Chase Sapphire Preferred, Citi Premier® Card (see rates and fees) and the American Express® Gold Card.
Cash-back credit cards
Cash-back credit cards may be a good fit for people who prefer to keep things simple regarding credit card rewards. There are no rewards programs to track, and you never have to worry about a card issuer devaluing your rewards. Plus, cash rewards allow you to spend your earnings on anything you like.
Cash back cards like the Blue Cash Preferred® Card from American Express are great if you want to maximize everyday spending categories like U.S. gas stations, U.S. supermarkets and select U.S. streaming services.
The Citi Double Cash® Card (see rates and fees) is a unique option to earn cash-back rewards that also have the potential for high-value redemptions when paired with a more premium card.
No-annual-fee credit cards
No-annual-fee credit cards can be a good fit for people who prefer to minimize their out-of-pocket expenses when earning rewards.
The Chase Freedom Flex is a great example of a high-value card with no annual fee. The card offers rotating 5% cash back categories where you can maximize your earnings. You can earn 5% cash back in rotating quarterly categories on the first $1,500 in purchases each quarter you activate. The best part is that if you also have the Chase Sapphire Preferred or Chase Sapphire Reserve, you can transfer these points to Chase's travel partners.
Related: How to maximize your Chase Ultimate Rewards points
Learn basic credit card terms
As you shop around for the credit card that ticks off all of your boxes, it helps to understand the basic credit card terms you'll come across during your search. Knowing these terms will better enable you to compare offers from multiple card issuers and choose your favorite.
- APR: This stands for annual percentage rate — the interest a card issuer charges you stated as a yearly rate. A card's APR may be less important than you think if you don't carry an outstanding balance. With most credit cards, you won't owe any interest if you pay your full statement balance by the due date.
- Fees: Credit card fees are additional costs associated with certain credit cards. Common fees to watch out for are annual fees, late payment fees, balance transfer fees and foreign transaction fees — to name a few. A credit card fee isn't necessarily a deal killer, but you should understand what you're agreeing to before applying for a new account.
- Minimum payments: A minimum payment is the lowest amount of money you can pay to your card issuer each month. If you don't pay the minimum payment, you may incur late fees, damaging your credit rating.
- Perks: Aside from rewards, some credit cards offer other perks that can be extremely valuable. Airline fee credits, TSA PreCheck and Global Entry credits, airport lounge access and rental car coverage are just a few examples. Enrollment is required for select benefits.
- Rewards: Credit card rewards are usually tied to how much you spend on the account. Rewards may come in the form of points, miles or cash back you can earn and redeem.
- Welcome bonus: A credit card welcome or sign-up bonus is an offer some card issuers make to attract new clients. Typically, you must spend a minimum spend requirement to qualify within a few months of opening your new account. For example, that might look like "spend $2,000 or more in the first three months of account opening". If you meet the spending requirement, you'll receive a certain number of points, miles or cash back in return.
Related: TPG's beginner's guide to credit cards: Everything you need to know
Review credit application requirements
We've already discussed how good credit is vital if you hope to qualify for a new credit card. Suppose you want to maximize your chances of being approved for a credit card. In that case, you should be familiar with other factors card issuers may consider, like household income and outstanding debt.
It may also help to review credit card application restrictions from different card issuers to see if any of them might hold you back. For example, American Express limits welcome offers to once per lifetime and restricts welcome bonuses if trying to open more than one card within the same family, while Chase will generally not approve you for a new card if you've applied for five or more cards in the last 24 months.
Because of rules like these, you'll want to apply for the highest Amex card bonus possible and keep track of your credit inquiries before applying for a Chase card.
Related: Want to open a new Chase card? Here's how to calculate your 5/24 standing
Bottom line
Ultimately, choosing a credit card comes down to deciding based on your personal needs. You should consider a card that offers the most rewards in your biggest spending categories and helps you meet your future travel goals.
Before you apply for a credit card, we highly recommend that you know what your credit score is and are aware of any card issuer limitations that could affect your ability to get approved or earn a welcome bonus. If you qualify and use your new credit card responsibly, it has the potential to be a great tool that can help you build credit while earning attractive rewards as a bonus.
Additional reporting by Emily Thompson, Stella Shon and Ariana Arghandewal.
For rates and fees of the Citi Double Cash, click here.
For rates and fees of the Citi Premier, click here.
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
