Best Credit Cards Part 1: First, Know How You Spend Money
Your consumption habits should dictate whether you go for cash back or travel rewards
What’s in your wallet?
Better yet: Is what’s in your wallet really right for you?
These days, the consumer landscape is littered with credit card offers as banks, brokers and financial services companies — even electronics giant Apple — compete to win a coveted place in your pocketbook. WalletHub reports that as of 2020, more than 1,000 credit cards were on offer in the U.S.
The vast majority of cards offer enticements: airline miles and access to airport lounges, hotel points, cash back, concierge services and on and on.
With so many options, searching for a new credit card can be mind-numbing. And the scads of websites offering advice aren’t always entirely objective sources of information since many have affiliate marketing arrangements that pay them to direct consumers to specific credit cards.
Let’s cut through all that.
Ask yourself: Do I need a new credit card? What card is best for me?
Though their basic function remains unchanged — paying for items when you don’t have or care to use cash on hand — the various perks credit cards offer might mean that your card is passé. Sort of like sticking with your Myspace page in the age of TikTok and Instagram. By upgrading your card, you can upgrade your lifestyle benefits.
But what is your lifestyle? Answer that, and you’ll know what credit card is right for you.
Personal spending patterns
You might think, for instance, you’re a cook-at-home kind of person. But if your credit card spending shows an abundance of restaurant charges, then that might better define the card you need.
Most credit cards offer an annual spending review you can download that separates all your annual charges into categories. This is a simple means of seeing how and where you spend your money. Then compare that data to the perks and cash-back benefits each card offers.
For example, you eat out a lot — say, $5,000 worth a year — and you reflexively gravitate to a card that offers 2% cash back on meals away from home. But when you examine your actual spending patterns, you might realize you’re spending nearly $7,000 a year combined on gasoline, toll roads and monthly parking fees. In that case, a card that offers a bonus rate of triple points on commuting costs, including gas, is a savvier choice.
So, if you have the time and inclination, build a simple spreadsheet to calculate the rewards you’d earn with specific cards based on real spending patterns.
The average American approach
The other option is to assume your spending broadly reflects the average American consumer, as defined by the Bureau of Labor Statistics Consumer Expenditure survey.
This 2018 survey was based on annual household income of just over $78,600 and shows where consumer dollars generally flow. Let’s exclude BLS categories for which you won’t earn credit card perks, such as mortgage and rent payments, car loans and retirement plan contributions. By and large, you cannot use a credit card for those costs.
Food at home: $4,464
Food away from home: $3,459
Healthcare/health insurance: $4,968
Personal care prod./services: $768
Personal insurance: $465
All other spending: $2,030
By applying to each spending category the bonus rate you’d earn with a particular credit card, you can determine where you’ll collect the biggest benefit. Two cards I looked at had varying point schemes and would have, on the above spending, awarded the equivalent of $498.93 and $596.83. So there’s some math to do.
Big purchase approach
Finally, a third method for selecting a new card is to consider big purchases you’ll make this year, such as a vacation.
While you typically cannot use a credit card to make car payments, you often can use it for all or some of a car’s purchase price — though you’ll need to alert the card company that the expense is about to hit, and you’ll need a lump sum of cash to immediately pay it off, lest you face massive interest charges.
No credit cards offer bonus rates for a car purchase, but several offer unlimited 2% cash back or 2x miles on every purchase. So a $25,000 car would mean either $500 cash back or 50,000 travel miles.
Similarly, if you’re planning a spendy vacation, you’ll want to focus on a credit card that offers a large signup bonus, and then you’ll want to plan your spending to meet the signup bonus requirements.
For instance, Capital One Venture Rewards currently offers 50,000 bonus miles for spending $3,000 in the first three months on a new card, which means at the end of 90 days you’ll have 56,000 miles to apply toward airline tickets (you earn 2x miles on every dollar spent, so 6,000 miles for $3,000).
Each mile is generally worth about $0.01, so you’ll have $560 to apply toward airline tickets, hotels, the cost of a cruise and the like.
All of which leads to the next big question: What are the best cards to consider?
We’ll tackle that in part two.