How to choose the right credit card

Aryan recently got married and his household expenses as well as his travel and leisure expenses have increased. He evaluated different credit cards in the market. He has found that rewards programs under which he earns bonus points for expenses charged to the card are very attractive for certain cards. However, he is confused by the many options available to him and wants to make sure he has considered all the factors before making a decision.

The card benefits Aryan is considering must be something he is likely to use. Some cards offer higher reward points for every rupee spent on expenses such as air travel or e-commerce usage or fuel purchases or expenses related to specific outlets. It makes no sense for Aryan to take these cards unless he expects to spend more on these items or at such outlets. If he has no such specific requirement, then ideally he should look for a card that rewards all spending made on the card. The reward points earned on these cards may be lower, but he will benefit because he will accumulate reward points regardless of what and where he uses his card. Once Aryan has decided on the type of card, he must evaluate the reward program himself. First, he has to check how much each rupee spent converts into reward points and second, how the accumulated points can be redeemed.

Most location-based or service-based cards can limit the use of rewards to specific points of sale or expenses. If it’s a card with a general rewards program, Aryan should opt for the one that gives him the most flexibility in spending his rewards points. Cards that give a percentage of the amount spent in cashback are the best on this point. Cards that allow him to spend rewards points across a range of outlets and services should be preferred to those that require him to select products from a catalog. These not only tend to be overpriced, but may also not be products that Aryan needs. He must keep track of the reward points that have been accumulated and redeem them periodically. If he’s saving for a major purchase, he should remember that rewards points may have an expiration date.

When evaluating rewards, Aryan shouldn’t overlook the costs associated with the card. Many co-branded and high rewards cards come with higher annual fees or renewal fees. Interest charged on outstanding balances may be higher than other cards. There’s no point in paying higher recurring fees if he doesn’t make extensive use of the card’s benefits. If he is clear about his needs and spending habits, he can plan on the right card and get the most out of it.

Content on this page is courtesy of the Center for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

About Shirley L. Kreger

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