Any respectable adult will tell you to have at least one credit card. Even if you are anti-credit or have loads of money, credit cards are very handy in emergencies, when making reservations, buying things online, or while traveling. But with so many options, how do you choose which one is right for you?
When choosing a credit card, there are five main things you need to consider (in no particular order):
REWARDS – The rewards of most credit cards fall into one of two categories: points or cash back.
Depending on what you like, choose one that offers you high value per dollar. Most credit card companies offer “travel” points that can be redeemed with some airline. You want to consider three things:
- What is the value of the points?
- What are the limitations?
- How much is the sign-up bonus?
INSURANCES – Insurances are probably the most underrated and overlooked aspect of a credit card. Insurances are tied to annual fees, the more insurances your card offers, the higher the annual fees. Since you are paying for them, make sure you know how and when you can use them.
Most credit card companies offer the same bundle of insurances (because they usually all come from the same underwriter) and each card will come with some combination of that generic bundle. The usual card insurances are:
- Travel medical insurance
- Flight delay and baggage insurance
- Lost or stolen checked baggage insurance
- Travel accident common carrier insurance
- Purchase security and extended warranty insurance
- Flight interruption insurance
- Flight cancellation insurance
- Car rental collision, loss, and damage insurance
- Hotel burglary insurance
ANNUAL FEE – The annual fees of a credit card are usually determined by the insurances on the card, but not always. Most companies offer a card with a substantially lower interest rate, but with a low annual fee. If you carry a large balance month to month, the money you save on the lower interest rate will usually outweigh the cost of the annual fee.
For an additional annual fee, you can add additional users to your account. The benefit here is that you often get a sign-up bonus, any additional spending from the secondary user will increase your reward points, and the secondary users are covered under the same insurance policy.
INTEREST RATE – Interest rates only matter if you carry a balance month to month. After working in the credit card industry for over six years, I would like to make a recommendation. DON’T BUY WHAT YOU CAN’T AFFORD! If you do not have the money for something, and it’s not an emergency, do not use your credit card. Most credit cards have interest rates around 19.5% for purchases and 21.5% for borrowing cash. So if you are out shopping and you see a pair of shoes you like for 50% off, it’s not really on sale if you don’t pay your card off each month. By the time you pay off your shoe purchase, you will have spent $300 on what you thought was only going to cost you $50.
If you are not using your card’s insurances and points, and are simply trying to pay off your balance, there are two things you should consider:
- Get a lower interest rate card.
- Take advantage of a competing bank’s offer to transfer your balance at a much lower rate (sometimes as low as 0%).
OTHER FEES – The fees are imbedded deep in the fine print of the credit card agreement. The banks and other credit card issuers make a lot of money on your ignorance. Here are some of the fees to watch out for:
- Over limit fees – Most companies allow you to go over your limit as many times in a month as you want without incurring a penalty, provided you get back under the limit by the time the statement prints. Know when your statement prints and allow room for the additional charges that get applied on that date i.e. interest, annual fees, balance protection fees…
- Cash advance fees – Taking out cash or using your credit card for “cash-like” transactions is very expensive. Avoid doing this if possible.
- Foreign conversion fees – Using your credit card in another country can cost you a lot more money than you think. Avoid this if possible.
- Balance transfer fees – A fee is usually applied for balance transfers. Pay attention when they read you the legal disclosure or read the fine print.
- Statement copy fees – When you order past statements, it can cost you $10 per month. Avoid this by doing online banking or storing your statements in a designated folder.
- NSF fees – This can be as high as $40. If you write a cheque to pay off your account and then the cheque doesn’t clear, you will usually get dinged on both ends.
- Balance protection/Accidental Death/ Card Assist… – I can’t say for sure that banks secretly add these expensive and useless fees to your account without your consent, but in my experience it doesn’t look good for them. It happens so often that there is no other logical conclusion to draw. Pay attention to your monthly statements, especially the end. These fees will suddenly appear one month when you are not paying attention, and be there (sometimes for years) without you even knowing what they are and where they came from.