If you’re between the ages of 18-29, you’re a Millennial. You’re the Netflix-watching, cable-cord cutting, mobile-savvy, urban-living (or living-with-your parents), live-life-to-its-fullest generation that values family and fun more than career and financial gain – at least, according to the stereotypes.
But you also grew up in a shaky economy. You know how debt can hamper your ability to live life on your terms and because of that, more than one-third of your generation has shunned credit cards. In part, that’s because your college campus isn’t or wasn’t crawling with company reps handing out free pizzas to anybody who signs up for their credit card (the way it was when your parents were in school).
Credit cards aren’t all bad, however. And if you’re going to use one, you might as well get one that throws some rewards your way. Here’s how to pick the right card.
What’s Your Pleasure?
Before you shop for a card, think about the kinds of rewards you want. Start by looking at how you live your life. If you pack a lot of miles onto your auto each year, you could look at a fuel rewards card, which saves money on gas.If you travel frequently – either for work or leisure – you might want a card that offers travel rewards: points towards airline miles, hotels stay, rental cars, cruises, all-inclusive getaways. Or, they might get you access into those exclusive airport lounges. Often, opening an account and spending a relatively small amount in three months (give or take) may earn you tens of thousands of points – good enough for a free trip.
For a good choice of options, see Top Airline Miles Credit Cards and Do Your Card's Travel Benefits Make the Grade? And if you really travel a lot, check out The Best Credit Cards for Travel insurance.
If you’re more of a homebody, you might want a cash back card, that returns a small percentage of the amount you've spent. The term “cash back” is a bit misleading: You won’t receive a check in the mail. Instead, you receive a credit on your monthly statement. It still represents a real and tangible refund, though.
Do some shopping to find the best cash-back rewards, and read the fine print. It’s more complicated than simply looking at how much you get back. When we’re talking cash money, there are bound to be some conditions – and there are.
For example, the Chase Freedom card offers 5% cash back. But that's only on certain categories of goods and services that change throughout the year. All other purchases get you only 1% cash back.
The Blue Cash Preferred card from American Express gives you an 6% rebate. But t you only get 6% back at supermarkets and it’s only on the first $6,000 spent in a single year. After that, you get 1% back. You also get 3% back at U.S. gas stations and some department stores, and 1% cash back on everything else.
If you’re looking for a card without all of the confusing stipulations, check out the Capital One Quicksilver Rewards card (see Credit Card Review: Capital One Quicksilver Rewards). It offers 1.5% on every purchase without any maximums or changing categories. For more, see Find the Top Cash Back Credit Cards.
How to Pick a Card
If you’re one of the more than 33% who have never held a credit card, how do you pick your first one? Without a credit card, there’s a good chance that you don’t yet have a credit score. That might keep you from qualifying for one of the better cards on the market. But you can still embark on The Journey to a Great Credit Score.
If you do have a score, and have built up a credit history, you need to ask yourself: Are you a revolver? A revolver is somebody who usually carries a balance on his or her card from month to month. If that's you, it’s probably better to get a card without rewards. Here's why: Those rewards we talked about above aren’t exactly free. You’re probably paying for them in the form of a higher interest rate or a higher annual fee on the card. Once you get through the introductory offer period where the rewards can be quite attractive, the interest you pay on your balance wipes out the value of the rewards.
The standard cash-back reward is one or two cents on the dollar. Even the best cash-back rewards cards offer 6%, or six cents per every dollar spent. One study found that airline rewards points have a mean value of $0.012. In contrast, the annual percentage rate you pay in interest is likely between 12% and 23%, depending on the card and your credit score. Anything is better than nothing, but not if you’re paying interest charges.
Of Annual Fees and Perks
Have a look at the annual fee on a card you're considering, too. They tend to skew higher on rewards cards than on conventional ones. Traditional wisdom says that a card with a higher annual fee translates to a card with better rewards, but that isn’t necessarily true. One study found that “You need to spend at least $50,400 per year in order for rewards rates on these premium cards to be on par and competitive with other credit cards.”
In general, if you spend less than $12,000 per year, you’re better off getting a no-annual-fee, cash back card. As your spending rises, higher cost cards may be the better value, especially if you value the exclusive perks premium cards offer.
The Bottom Line
A credit card isn't crucial to everyday life. But it can make it easier to make everyday purchases. And if it does so while giving you rewards points along the way, why not take advantage? Just be sure to keep spending in perspective: Never let the rewards tail wag the credit dog. For more information, see Credit Card Rewards: Cash Back vs. Airline Miles.