No doubt, in 2020, there are many credit cards to pick from, but how do you choose the best one? In this article, we’ve asked the experts. We came up with a list of the different types of credit cards and their features to be on the lookout.
If you can make use of the best features a credit card offers, it can be well worth it. Also, I think the responsible use of credit is certainly a pillar to financial stability. However, if you have to pay to have access to the credit card, and you can’t make it worth your while, you might consider changing it or canceling it altogether.
Let’s dig in and discover everything about the different features of credit cards in 2020 have.
Main credit card types
It’s best to choose the credit card that will give you the most bang for your buck. For example, if you can spend $1,000+ a month on your credit card, then indeed, a credit card offering cash back or points might make sense. Or, if you have some debt you’d like to consolidate, a balance transfer card might make the most sense for you. Indeed, thinking about how to get rid of bad debt should always be top of mind.
Types of Credit Cards
- Secured Cards – Ideal for those with no credit history or who need to rebuild credit.
- Free / No Annual Fee — great for new credit card users, no annual fee, a shortlist of perks. These are ideal for students or those who are getting their first credit card.
- Low Interest / Balance Transfer — Some cards come with 0% balance transfers or very-low interest. These credit cards can be an ideal way to save money on interest. Some of these cards come with annual fees, and others do not.
- Premium — Ideal for travelers, usually comes with airport lounge access (I.e., Centurion, Priority Pass, etc.). These credit cards often offer points or cashback and bonuses on specific spending categories, such as gas and groceries. Also, they include additional insurance coverages, concierge service, and so on.
Secured Credit Cards
If you don’t have a credit score or you’re trying to rebuild credit, you’ll likely need to apply for a secured card. Many large banks and financial institutions offer these cards, generally at no annual fee. However, the interest rates and other fees can be hefty. So, it’s best to watch out.
If you’re starting, perhaps as a student going to college, I recommend applying for a credit card, and if you get offered a secured card instead, go with that. Accepting a credit card with no fees and may only provide basic features and rewards. For example, just about every credit card comes with purchase protection covering lost or stolen items purchased through the credit card.
Low Interest and Balance Transfer Cards
Low interest and balance transfer cards are generally available to people with very good to excellent credit. With balance transfers, the zero or low-interest rate period will expire, so it’s essential to pay the balance in full before the offer expires. With low-interest cards, they offer an introductory period or a fixed low-interest feature.
Fixed low-interest cards are ideal for those looking to carry a balance beyond a balance transfer period. For example, they could be used to finance large ticket purchases such as a car. Indeed, my low-interest card hovers around 4-5% (Prime plus 1.4%), which is better than most other consumer offers out there.
Take Advantage of the Credit Card Offers
One of the best ways for using a credit card to your benefit is by taking advantage of a balance transfer feature. A balance transfer allows you to move outstanding debt from one account to another. Typically, consumers move balances to save money on interest. However, if not used correctly, balance transfers can lead to never-ending debt spirals.
Also, balance transfer fees can be high, so read the fine print carefully, says Freddie Huynh from Freedom Debt Relief. Balance transfer fees get calculated as a percent of the balance amount transferred; it’s often 1-5%. So if you transfer a balance of $10,000, the fee might be as high as $500.
But, is it worth it?
To determine if the balance transfer is worth it, ask yourself how much you would pay in interest on your original card? Use an online calculator (many available) to review.
Either way, using a balance transfer can save you a significant amount of money in the long run by lowering your monthly credit card balance, as well as possibly leading you to receive other perks.
I’m a big fan of premium cards, especially if you travel frequently, says Tony Matheson from Matheson Financial Partners. Considering that many premium credit cards offer access to the best airport lounges (feature), the offer of food at airport lounges alone can be worth the card’s cost. In the era of COVID, many of the cards are pivoting their perks to non-travel related benefits, like streaming app credits or meditation.
Also, premium credit cards can be worth the annual fee if they offer elite status to certain travel brands. For example, without ever renting a car, visiting a specific hotel chain, or flown on an airline, you can get elevated or top tier status by merely holding the card.
Some premium cards are better than others. My personal favorite is the Chase Sapphire Reserve, says Brooklyn Lowery from CardRatings.com. While the Chase Sapphire Reserve carries a $550 annual fee (temporarily reduced to $450 due to COVID-19), she earns substantially more in the form of benefits.
However, premium credit cards typically come with income requirements, says Jack Choros from Sophisticated Investor. Suppose you want to get an American Express Centurion (Black) card, for example. In that case, you need to be relatively wealthy, but the advantage is having access to having this prestigious credit card, are its features and rewards. And, even a professional concierge service at your beck and call.
Ultimately the best way to choose a credit card is to:
Ask yourself key questions:
- How much money are you going to spend on your card every month?
- How often do you travel?
- What kind of things do you buy on your credit card?
- Are you a frequent flyer?
- What’s your income?
- What are your other financial goals outside of managing your credit?
- How often do you use your credit card?
Are premium credit cards worth it?
While premium credit cards might be worth it to me, they may not be worth the annual fee to you. To find out, put a dollar amount on the features and perks that come with the credit card. And, don’t forget to include cash back and/or points. Then, add it all up. If the perks come in more valuable than the annual fee, then the card is worth it.
For example, I once got a free night (annually) at a luxury hotel chain just by being a cardholder. Not to mention, a laundry list of other perks. The annual fee was $120, yet the hotel room’s value alone was north of $500 a night. Also, I used to subscribe to identity theft protection, but my card includes it. So, to me, this premium credit card feature was well worth it!
What about metal cards
Last, some premium credit cards come in “Metal.” Resist all temptation to hold one of these cards just because they are metal. Sure, they likely come with a laundry list of perks and features, if you can’t make use of them, there’s no sense in having it, regardless of how it sounds when you drop it on the counter!
Travel credit cards often offer a miles-based points program redeemable on either a specific airline or a choice of many airlines. Those cards branded to specific airlines often offer elevated status, free luggage, and priority boarding, among other things.
Other travel cards offer points programs that work on many airlines, and sometimes even other travel-related products, such as hotels and car rental companies.
The Chase Sapphire Preferred and the Capital One Venture is perfect for millennial travelers, says Alex Capozzolo From Brotherly Love Real Estate. Both are free for the first year and have large, yet easy to attain, sign up bonuses once you spend $4000 within the first three months of owning them. Indeed, this is typical of many airline company credit cards too. However, with the Chase and Capital One cards, you can use the points for nearly any airline.
Capozzolo recommends starting with one of these as they offer the best bang for your buck if you can’t afford to spend $495/year on other higher-end travel credit cards.
In many cases, cash back is not better than points cards. In my own experience, points work well if you use the points toward an international business or first-class ticket costing north of $5,000. However, if this is not your typical type of travel, you might get much better value with a cash back card.
If cash back credit cards make sense for you, then using one is a way of literally getting paid to spend on your everyday purchases. Cashback credit cards work by paying the cardholder back a certain percentage of the purchase amount, usually between 1% and 4%, that accumulates on the card holder’s account, says Garrett Greller from Uncle Bud’s Hemp.
There are often spending categories such as gas or groceries, where users earn even more cash back.
As with any premium credit card, it’s essential to pay the balance in full every month, as any interest charges will negate any cashback earnings.
The most premium credit cards are hybrid points cards that offer a choice of cash back and travel. Hybrid points cards are my favorite type of credit card for everyday spending as they give me the flexibility to choose my reward. Sure, the annual fees are usually higher, but the flexibility to use the points as I want makes it worth it.
According to Alex Miller from UpgradedPoints.com, today, there are four main points types with the best value, since these are transferrable currencies (can be moved to different partners):
- American Express Membership Rewards
- Chase Ultimate Rewards
- Citi ThankYou Rewards
- Marriot Bonvoy points
Each of these programs has unique offerings and is worth looking into further.
Which is better, premium credit cards offering cash back or points?
The pandemic brought travel to a screeching halt in 2020, but that doesn’t mean you should completely forget about your credit cards, says Brooklyn Lowery, from CardRatings.com.
Points cards often offer more flexibility when it comes to redemptions than cash back cards do. Many points cards that market themselves as travel rewards cards often allow you to redeem those points for cash back. Unfortunately, the opposite isn’t as often true for pure cashback cards.
Furthermore, we’ve seen top travel rewards cards re-imagine their programs in light of the pandemic. Now, they offer their cardholders new options or value for redemption opportunities outside of travel, adds Lowery.
Be sure to check the annual fee
Usually, the better point or reward programs or cash back programs are tied to cards the charge an annual fee. The best travel credit cards typically cost $100-$490 a year. And, some are even starting to charge a monthly fee instead of an annual fee.
Premium cards will often give you a welcome bonus worth approximately $300 – $500 in rewards and features. And you can use them right now for flights or hotels. However, they often come with a minimum spend (i.e., $3,000 in the first three months).
It doesn’t matter if you’re a boomer or a millennial. You have to be able to make use of the credit card features and rewards. Also, it’s important having a budget, controlling your spending habits, and improving your credit history.
Consider the rewards you might want most.
The best credit card depends on the rewards and benefits you want to receive. For example, if you travel often, you’ll likely want a card that offers rewards points, or in miles. This way, you can redeem them for free flights and hotels, says Jordan Tarver from FitSmallBusiness.
If you don’t travel, you might prefer a card that offers cash back. This way, you can redeem your rewards as an automatic credit to your bill or as a direct deposit into a checking account.
The advantage of cash back credit cards is greater flexibility in spending. With points, you might get limited to specific categories, like travel, for example. Cash back options let you spend the funds any way you like and make the most sense.
When it comes to cashback and points, one is not necessarily better than the other, adds Tarver. The best type of reward is the one you can take the most advantage of.
How to get the most amount of cash back or points
Set up your bills to be automatically paid using your credit card. Most utilities and subscription companies allow you to do that instead of a direct debit from your checking account, says Andres García-Amaya from Zoe Financial. By making bill payments with a credit card that you already budgeted (payments you would be making anyway), you’re essentially getting your credit card features and rewards for free.
Moreover, if you plan it right, you may even be able to set up automatic withdrawals to pay your card balance. Interestingly, some banks offer the ability to take the minimum payment or even the entire balance from your checking account.
In my case, I have the minimum payments set to withdraw from my checking account. To be sure, it’s just in case I forget to pay my credit cards. But typically, my credit cards get paid in full, twice a week, so that I never have to pay interest.
An intriguing company called Plastiq allows people to pay for virtually anything with their credit card. Yes, people can pay their bills, and even their mortgage using a credit card! However, you’ll have to pay a fee (there’s no such thing as a free lunch). So, be sure the cost is worth it before using a service like this.
Things to look for in a credit card
According to a recent study, there are more than 1000 different credit cards available to apply for. To make things even more complicated, each have their own unique attributes that you’ll need to research before applying. Here are some things to consider when applying for a credit card.
In general, it needs to make sense to pay an annual fee. If you don’t get value from your credit card and its annual fee, look to getting a no annual fee credit card instead.
Today, credit cards come in many forms, and annual fees range from $0 to over $5,000/yr. And, the American Express Centurion even has a $10k initiation fee! Most, however, fall in the $100-500/year bucket.
The value of credit card features and rewards
Steep fees can wipe out (or decrease the value of) rewards quickly. However, there’s no such thing as a free lunch. Premium perks come at premium prices. Banks sometimes offer a discounted or free premium credit card bundled with a premium banking service. For example, some banks will offer a premium credit card with no annual fee. But, only if you maintain a specific dollar balance. Other banks might provide a free premium card with a premium checking account. However, you pay for the credit card and its features in the form of a monthly account fee. Either way, the bank gets its fees. It’s up to you, the consumer, to take advantage of the situation as best as possible.
Also, sometimes you can pay a slightly higher annual fee to get a lower interest rate. For example, most cards come with a standard 19.99% interest rate. If you can get a card that charges you 7% or 10%, and you have a significant balance to pay off, it might be worth it to pay a $50 $100 annual fee just for that privilege.
Insurance comes with many credit cards. However, premium cards usually get the best insurances!
These are the most common types of insurances available on credit cards across the board:
If you become disabled, the policy covers at least your monthly credit card bill’s minimum payments.
If you pass away, this policy covers the remaining balance on your credit card.
Suppose you don’t have a disability or life insurance policy. In that case, you should have a credit card with these insurances. Indeed, they could keep you from destroying your credit or leaving your family with debt, says Sa El from Simply Insurance.
Involuntary Unemployment Insurance
If you get laid off from work, this policy can cover at least the minimum payments. Unfortunately, this may not work if you get fired, however.
Rental Car Insurance
Several credit cards offer rental car insurance, such as loss of use, collision damage (CDW), and loss damage waivers (LDW). These can be especially helpful for those who need to rent a car during a vacation or get-away. You can save money by using what’s available to you through your credit card, free of charge. It’s certainly better than purchasing temporary coverage directly through a car rental company. However, I have yet to find one credit card that covers liability in a rental car.
Various Travel Insurances – The best credit cards offer different travel insurance covering trip cancelation, emergency medical, and even theft. Each credit card has its own terms and conditions. As a result, it’s essential to read them carefully!
Foreign FX fees
When traveling aboard, consider the effect of foreign currency exchange fees. If your credit card offers a 0% FX fee, it will be particularly useful when you travel abroad, says Andres García-Amaya from Zoe Financial. It will allow you to earn points without losing 3-5 percent of your money on all your overseas purchases. So, if you want to save money while traveling, definitely use a NO FX fee credit card.
If you spend more than $2,000 a month, have very good to excellent credit, a premium credit card can likely offer you significant benefits you might not have known existed. And last, don’t forget to check our Credit Card FAQ for all the latest information about it.