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Choosing the Right Credit Card – Make the Informed Decision

debt

Credit card reward programs are more popular than ever. In order to keep up with such high demand in a competitive market, credit card companies are coming up with new and more enticing offers every day. How do you know which one to choose?  As with most financial planning quesitons, the answer is dependent on your individual situation.  What is your pattern of spending money? And, what is your typical mode of spending on travel or other potential rewards?  To start with the analysis, you must start with the relevant factors.

Some of the main credit card company factors to consider are the following: annual cost, sign-up bonus, points rewarded, costs to redeem points, how the points can be redeemed (cash v. product), and perks.  (You may argue that interest rate should be considered. I would suggest that if you cannot pay it down with incurring the higher credit card interest, then the purchase should not be made.)  The main types of reward cards currently on the market are travel rewards cards, cash back reward cards, combination cards.

As with all purchasing decision, you should be evaluating the value of the purchase?  What is the cost compared to the benefit?  Thus, start with cost, but do not automatically rule out the more expensive card.  Similarly, do not assume the “free” card is necessarily the best for your situation.

Are you the type of credit card user who likes to travel and/or frequent a particular hotel or airline? If so, then a travel rewards credit card might be the right option for you. Typically, a travel rewards card allows you to earn points (sometimes referred to as miles, depending on the card) for every purchase you make on the card. Typically, cards offer a reward that is equal to 1% of your purchase, which means that for every $100 you spend, you will earn 1 point or mile. These travel rewards cards may give you a bigger reward ratio when you spend it on a particular travel expense (e.g., particular hotel or airline), and they may also provide for a better reward ratio if the reward is a particular travel expense (e.g., particular hotel, airline).  If you will have otherwise used the reward in this manner, a travel rewards card may work great for you.

Some credit card companies offer even greater incentives, such as double points for specific types of purchases or bonus points when you open up an account.  Some travel cards provide for additional perks such as car rental insurance, travel insurance, and lounge access.  When evaluating the perks, ask yourself what the true value is to you?  If you do not value the perk and the credit card company is effectively building that perk into the price, then this card may not be for you.  Before signing up, however, be sure to read the fine print. Many travel rewards cards have specific rules that apply to point redemption and may charge a hefty annual fee.

Don't want the hassle that sometimes goes along with redeeming points on a travel rewards card? Consider a cash back rewards card. While not as thrilling as racking up points to take a trip to some far-off, exotic destination, cash back rewards cards may be better for individuals who aren't frequent travelers and who tend to use credit cards for everyday purchases. Most cash back rewards cards offer a flat cash reward on general purchases. Others offer higher rewards for different spending categories (e.g., dining or entertainment purchases). Consider your credit card spending habits to determine which cash back rewards card would be appropriate for you.

For the analytical-minded individuals out there, you may want to consider creating a spreadsheet that takes into account these various factors.  This will at least help narrow down the value of what you will be receiving (or not receiving). While there are various online sources that will attempt to help you narrow it down, caution is warranted, however, as many of these sites are paid to promote particular credit cards. Consumer Reports does provides an online calculator for rewards on many credit card options and is worth reviewing.  If you would like a spreadsheet, feel free to touch base. 

Based on your circumstances, it may be beneficial to consider utilizing two reward cards.  By matching the appropriate spending with each card, you may be able to obtain the most value.  Costs and simplicity are obvious considerations.

Finally, it's important to remember that rewards cards work best when you pay off your account balance each month. Be sure to charge only what you can afford to pay off and avoid spending over your budget just to earn more rewards. Otherwise, the unpaid balance you carry forward will create finance charges that may cancel out the value of any rewards you accumulate.

Modified by Oasis Wealth Planning Advisors with initial preparation by Broadridge Investor Communication Solutions, Inc. Copyright 2016.