How to Compare Credit Cards
Americans love credit cards. (In fact, the average person has 4 of them.) They're convenient and can help finance large purchases. But beware:
Credit comes at a price, and some cards are better financial bets than others.
When choosing a credit card, you’ll likely face a dizzying array of options. Sorting through interest and fees is overwhelming, but the payoff is worth it.
In the market for plastic? Here are six of the most important metrics to consider when comparing credit cards.
No. 1: Interest rates
One of the most important factors in choosing a credit card is the interest rate. And the best interest rate is the lowest.
Interest on credit cards is expressed as an annual percentage rate, or APR. APR is a fee paid for the ability to borrow money on a credit line. Interest is the basis for how much cardholders will spend if they charge a credit card and don’t pay off the balance in full at the end of the month. Basically, cardholders who carry a balance month to month must worry about interest rates.
Each credit card issuer determines their own interest rates. But credit scores play an important role. Generally, higher interest rates are given to riskier borrowers and lower rates are given to trustworthy borrowers.
Why is this important? Lower interest rates mean you aren’t charged as much money on the balance you carry on a credit card. Ultimately, this means less money for you to pay back.
Further, interest rates on one credit card may differ based on the type of charge. For instance, a purchase from a merchant is treated differently than a cash advance or a balance transfer charge. They likely each have their own APR.
How do you compare interest rates?
To compare a credit card’s APR, look at the terms and conditions for each issuer and each type of card. Fortunately, information on terms and conditions is always displayed in the same format — making it easy to locate and understand.
Keep in mind that credit cards often have multiple interest rates. Compare each category, including purchases, cash advances, balance transfers, and promotional rates.
No. 2: Fees
Credit card issuers also set their own fee structures. Not all issuers include all types of fees, but it’s important to take into consideration the most common ones before accepting a credit card offer. As you compare credit cards, look for transparent and reasonable fees.
An annual fee is charged once a year for the convenience of having a rewards card. Not all rewards credit cards have an annual fee, but often, the most coveted ones do. An annual fee can range from $20 to several hundred dollars.
A late fee is charged for missing the minimum payment due date.
Balance transfer fee
A balance transfer fee is charged when moving a balance from one credit card to another credit card. It’s often a percentage of the total amount of money transferred. Thus, large balance transfers come with larger fees.
An over-limit fee is charged for exceeding your total credit limit.
Cash advance fee
A cash advance fee is charged when you request a cash advance on your credit card. The fee is charged for each cash advance transaction in addition to ATM fees.
No. 3: Rewards
Did you know your credit card can reward you with money and gift cards? Credit card rewards provide a benefit for cardholders to use their card. The amount of rewards earned and the types of rewards varies by issuer and card. But beware — rewards credit cards often cost more than other credit cards, thanks to an annual fee.
Credit card rewards typically fall into one of three categories: cash-back, points, or travel miles.
Cash-back rewards are straightforward. When you use your credit card, you receive cash-back incentives. It doesn’t necessarily mean cash. Some programs redeem the cash as a deposit to your account, while others send a check or allow the redemption for a gift card.
Points rewards are awarded based on each dollar spent. For example, one dollar may equal one point. Once you reach a certain number of points, you can redeem the points for a gift card, cash, or travel. Many banks partner with merchants to give you more bang for your buck when you opt for a gift card reward. For instance, a gift card purchased with points might receive 20% off the original value — stretching your dollars.
Travel miles rewards
Travel rewards cards convert purchases into redeemable dollars for airline tickets and hotel rooms. The miles a cardholder can earn varies according to the credit card and frequent flier or hotel rewards programs. And one disadvantage to travel miles is the conversion process. When cardholders convert miles to dollars, they might lose points depending on the travel program.
No. 4: Credit card network and issuer
The credit card network you choose, and thus, the card you use to make purchases matters. It’s the difference between a Discover card and an American Express card.
Does your local grocery store take Amex? Will your Discover card be useful for your next trip abroad? If not, maybe consider a different network or issuer.
A credit card network processes a transaction between a merchant and the issuer. A credit card issuer is a financial institution, such as a bank or credit union, that provides the financial backing for a credit card.
There are four primary credit card networks: Visa, MasterCard, American Express, and Discover. These are the largest and best-known networks. It’s important to select a credit card network carefully because you can only use a credit card with merchants, like restaurants and stores, that are accepted by the network.
For instance, Discover credit cards aren’t as widely accepted within and outside of the United States as other credit cards. Further, Visa reigns supreme in the card network industry, followed by MasterCard, American Express, and Discover. Research credit card rankings for a complete list of how each card network and issuer stacks up — beyond the top four.
Issuers are financial institutions, such as Chase, Capital One, Bank of America, and Citi. The issuer is also referred to as an issuing bank or a credit card company. Choice of issuer often comes down to preferred financial institution and the available terms and conditions associated with each company’s credit cards.
No. 5: Chance of approval
Before applying for a credit card, find an offer with a high chance of approval. This depends on your personal financial situation. Be sure to research the eligibility requirements and make sure that you’re a fit.
There are two reasons why it’s important to understand your chances of approval.
First, understanding your approval chances will save you time. Don’t apply to every credit card offer you see. Given the constant promotional efforts for credit cards, that could quickly total hundreds of offers! Narrow your search and apply strategically.
Second, it will save your credit score. Each hard inquiry from a credit card issuer checking your credit report has the potential to negatively impact your credit score. The fewer credit cards you apply to, the better.
When you’re applying for a credit card, issuers take several factors into account. To qualify, applicants must meet credit score, income, and expense requirements.
Evaluate your credit score when comparing credit card approval odds. Check your credit report to know where you stand. Then, determine how you stack up based on the issuer’s range of accepted scores.
Credit card issuers must ensure that applicants have a reliable income in order to pay off their monthly expenses. There’s no official minimum income, however. Research each issuer’s guidelines or use your best judgment. Apply for a credit card while you’re employed with a steady income.
Credit card applications often ask for an estimate of monthly expenses. This usually includes your current rent or mortgage payments. Issuers ask this information to gauge how much money you plan on spending versus how much debt or other financial commitment you have.
Major credit card issuers allow applicants to prequalify for certain credit card offers. This convenience allows interested applicants to estimate their approval chances without a hard credit inquiry.
Pre-approval for a credit card doesn’t guarantee approval, but it does increase your chances. And don’t worry, you don’t have to accept an offer when checking pre-approval eligibility. It simply allows you to compare multiple offers before making a final decision.
No. 6: Customer service
When comparing credit cards, it’s important to weigh the reputation of the issuer. Are they a trusted financial institution, such as an established bank or credit union?
Use the Better Business Bureau (BBB) platform to check the company’s grade, read reviews, and learn about their customer service.
Look for customer reviews that highlight responsive, helpful, and transparent customer service interactions. A highly rated customer service center can make a huge difference in your overall credit card experience.
Looking for a new credit card? Be sure to shop around and compare important differences to find the right one for you.