Choosing the Right Credit Card: Adapt to Changing Landscape

With credit cards in wider use than ever and average household debt at record levels, selecting the right card for yourself becomes an important financial decision.^1,2 But how do you decide which card is best?

Here’s a look at how to choose a credit card and why you might want to choose a new one that’s better suited to your needs this year.

When choosing a new credit card, it pays to think hard and choose wisely — a credit card can be a long-term commitment. Credit card companies often reward their most loyal customers, and many Americans stick with the same card for years. Still, there are some situations where it might make sense to explore a new credit card. Here are three questions worth considering when choosing a credit card:

• Why a new card? People’s reasons for choosing a credit card vary. Some want more spending flexibility, while others want to max out their rewards-earning potential. Generally speaking, your primary reason for wanting the card should determine the type of card you look for. If general spending is your aim, it probably makes sense to choose a card with a 0% interest introductory rate and rewards that are relevant to you.
  

• Will you carry a balance? If you do, it may be more important to choose a lower annual percentage rate (APR) credit card with low fees instead of one that offers generous rewards. Or perhaps you’d want to consider a card with an introductory 0% APR period on purchases. In this case, you could avoid paying interest entirely — as long as you can zero out your balance before the promotional APR expires.
  

• What will you spend on? If you don't plan to carry a balance, then a card that offers large rewards can work in your favor. But different cards offer higher rewards for specific types of purchases. Choosing a credit card that offers discounts on restaurants makes little sense if you only occasionally eat out. To reap the advantages of a rewards program, it's good to review your monthly expenditures to see where your money really goes — especially if your lifestyle has changed in recent years.

As mentioned, credit card interest rates can often be fairly high. But paying off credit card debt could become even more costly if the Federal Reserve raises interest rates even higher in an attempt to tamp down inflation, as we’ve seen in recent months. And if rates rise higher still, the minimum monthly payment due on credit cards could also increase.³

Rising rates could be especially tricky to manage for anyone with a student loan. In response to the pandemic, the government suspended payments on student loans, making it easier for many people to keep up with their credit card balances. But while that forbearance has been extended multiple times it is expected to come to an end this year. If this happens, and graduate borrowers have to resume making payments on their student loans, they may struggle to do so on top of their higher minimum credit card payments.

With a changing credit card landscape comes a new credit card option: buy now, pay later (BNPL). Available from retailers for many years, the popularity of BNPL payment plans spiked since the start of the pandemic as consumers shifted to online shopping. Now card issuers are also embracing these plans, with the most common versions allowing card members to pay off the purchase in a set number of installments, often interest-free if paid on time or with a flat fee per plan.

A potential downside to BNPL plans is that they can make it easy to overspend. And what appears to be an interest-free loan at the outset can quickly accrue late fees and interest charges if payments are late.

Another trend for credit card use in 2023 includes substantial tweaks to reward programs to make them more relevant to shifting lifestyles in light of COVID. In particular, some credit cards that once rewarded travel have been reworked to maintain relevance for more stay-at-home-minded card members. For example, these cards are expected to offer their users more lifestyle-related rewards and perks – like streaming credits and at-home workout benefits – that can be enjoyed without boarding a plane or hitting the road.

Given how high interest rates have risen in recent months and the chance that they could increase higher still, if you carry a balance on your credit card, it might be smart to begin paying it down. With that in mind, it may be worth keeping an eye out for any temporary low interest promotions you may be able to opt into. These occasional perks can help you whittle down debt while accruing less interest.

 
In some cases, reevaluating your credit card each year and considering whether you’d be better off switching to a new card, or even doing a balance transfer, could be an option to consider. Credit card companies change their offers from time to time, so you’ll want to evaluate whether your current credit card offers rewards that are in a category that’s still relevant to you. Another reason to consider a switch is to take advantage of a potentially valuable introductory offer. 

Plus, choosing a new credit card may help boost your credit score. Adding a new card’s credit limit without increasing your total spending may improve your credit utilization ratio, which is the percentage of your total credit limit you’re using – a key factor that contributes to credit scores. 

And if your credit score has improved since the last time you applied for a card, you may be able to qualify for a new one with benefits that better meet your needs. If you do choose to open a new card, remember that closing a credit card with a zero balance could lower your credit score. 

With uncertainty surrounding interest rates, and the chance that they could continue to rise, it’s a good idea to avoid carrying a large credit card balance if you can. At the same time, increased industry competition has prompted many card issuers to offer more attractive terms and rewards, making this year a great time to choose a new card. 

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