A credit card allows you to borrow money from a financial institution to make a purchase[cite::219::cite]. They are generally used for short-term financing. But, not all credit cards are the same.
How to choose a credit card depends on your unique situation, its interest rate and the benefits you can receive from the card.
Interest Rates Explained
An interest rate is the amount of money a financial institution charges to borrow money, usually expressed as an annual percentage rate, or APR. According to Value Penguin, interest rates on credit cards in 2017 varied anywhere from 13% to 23%. Interest rates vary depending on the card issuer, and many of them depend on a borrower's credit score. Finding the best credit card rates is a factor to consider prior to signing up. Ideally, you want to find an interest rate below 17%. You can avoid paying these heavy interest rates if you simply pay the balance off within 30 days of your purchase.
Types of Credit Card Rewards and Perks
There are many perks to using a credit card, including cash back programs, points, and travel rewards:
1. Credit Cards with Cash Back
With this type of credit card reward incentive, a percentage of the money spent by the borrower is given back. The best credit card for cash-back varies from 1% to 5% back in your pocket. Most cash-back programs are paid to you annually. This is the best credit card reward for those who pay off their card every month in full.
2. Credit Cards with Travel Rewards
For many people, travel is a luxury that eats up a considerable part of a yearly budget.
This is why travel reward credit cards are widely used. Many card users swear by a travel points system. In fact, some longstanding cardholders haven’t paid for airline tickets in several years. With this type of card, purchases earn points or miles used for air travel.
With some cards, points for air travel and hotel expenses can be used.
3. Credit Cards with Points and Various Rewards
Some cards offer incentives, or "points," that accrue as money is spent and can be used for merchandise, gas, dining out, or other specific rewards. These credit cards offer different point accrual rates, depending on where the card is used or what is being bought.
Deciding on the Best Credit Card Reward for You
With so many credit card options available, picking the right card can seem like a daunting task. It's best to choose a card with perks tailored to your needs and lifestyle. For example, if you are someone who rarely travels, a travel rewards card doesn't make sense for you, and a cash-back program may be a better fit. If you are someone who is always at the latest restaurant opening, finding a card that offers dining-out rewards would best suit your lifestyle. If you have a long commute or travel via automobile frequently, you may consider using a credit card that offers gas rewards.
Beyond your lifestyle, assess the credit card's interest, annual fee, penalty charges, and other related transaction fees before choosing the perfect credit card for your unique needs.