In the right hands, credit cards can be powerful tools to help cardholders establish a better credit history or to earn rewards on everyday spending. But used the wrong way, credit cards can quickly turn into a debt trap. Which is why finding the right credit card for your needs is important.
In the video segment below, The Motley Fool analysts Nathan Hamilton and Michael Douglass talk about a simple three-step plan you can use to narrow down the offer pile and find the right type of credit card. Once you've run through the steps, check out our picks of the best cash-back credit cards.
Michael Douglass: Here at The Motley Fool we're all about actual advice. People talk a lot about, "Oh, you know, find a credit card that's right for you," but here we're actually going to give you a step by step guide to sort of thinking about how to do that. It's just three steps, so we'll keep it extra simple.
Nathan Hamilton: Distill it down to the most basic possible.
Douglass: Exactly, and the most important. Step one, figure out your primary credit needs.
Hamilton: Yeah, this is important because you want to figure out, am I in debt currently and I want to pay down that debt fast with, say, 0% promotional APR, or am I paying my balances off monthly? In that case it makes sense to avoid interest charges to earn rewards because for earning rewards, there's no sense in doing it if you're going to incur interest charges as well. That's step number one.
Douglass: Step number two is to figure out whether you're hands-on or hands-off with your finances. By the way, whether you entered step one knowing whether or not you were in debt might be a sign, as to how hands-on or hands-off you are.
Hamilton: Hands-on or hands-off essentially makes sense when you're earning rewards and in that context. If you are hands-on with your finances and you pay attention, if you're willing to give some extra time, if you're maybe not taking as much time to do your hobbies and et cetera ...
Douglass: Or maybe if this is your hobby.
Hamilton: Yeah, if finance is your hobby.
Douglass: Which is the case for both of us, which is, I recognize, maybe not average.
Hamilton: If you are that sort of person that spends more time keeping track of their finances, multiple cards can make sense. The reason why you would do that is some cards will offer bonus cash back in a niche category, but that doesn't represent the majority of your spending. It doesn't make sense to carry one card just for gas purchases. What about groceries, what about utilities, everything else? Looking at it you can optimize your cash back there, get another card that has a higher flat rate cash back for everything else.
In those instances you are introducing complexity to your finances, but if you are hands-on it makes sense. If you're hands-off, just go with one single good cash back card. I would suggest looking at something that's 1.5% cash back or higher, that's sort of the base standard for no annual fee credit cards.
Douglass: Yeah. Your step three then is to kind of look at your budget and say, "Okay, you know, this is a big niche that I'm spending a lot of money on." Think really hard about getting your credit card for that, and then kind of, as you said, kind of like one base card to use in addition to that. Of course, whether you end up having two credit cards or maybe three kind of depends on your personal circumstances, how much you're looking to put into it.
For example, I don't spend a lot of money on gas, I actually walk to work. A gas card wouldn't make much sense to me, but maybe I spend a lot at the grocery store, so a grocery store card, or something that rewards food purchases. I spend a lot of time eating out, and a lot of money eating out, that could be a thing as well. It's sort of like, what are the big parts of your budget and are there cards that really align well with that? If so, that's something worth considering if you're hands-on and you're good at staying out of debt.
Hamilton: If you're hands-on and good at staying out of debt, that's absolutely the most important disclaimer. Credit card debt can be very costly, it introduces stress to your life. It can be hard on a marriage, anything. It does keep you from investing in your future, and those are important things to consider now.
Douglass: Yeah. Once you've done these three steps, your fourth step, your bonus step is to come on over to fool.com/creditcards, check out our list of the best cards. We've got best cards for different categories, we've got best cards for different borrowers, we've got a lot of different, good information there and a lot of really in depth credit card reviews. There's a lot of information there that you can use in terms of figuring out what makes the most sense for your circumstances. We look forward to seeing you there.