Week three of the rewards refresh: Know thyself

Welcome back! This is the third installment in a six-week quest to identify the best credit card for you. Whether you’re thinking of signing up for a new card or sorting through what you already have or even if you’re just browsing, I’m going to share my thought process and best practices for making sense of what can be a complicated, individual decision.

The steps are intended to be completed in order, but don’t worry if you missed one. There’s still time to review part one (sorting through the cards you already have) and part two (examining your spending habits). Now, on to round three!

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Your third assignment

This week, we’re going to build upon the examination of your spending habits that we worked on last time. How you spend your money is a significant factor in determining the best credit card, since different cards emphasize different bonus categories such as groceries, restaurants, gas, travel and more. There are many other individual factors to weigh, and that’s where we’ll focus today.

I’m talking about things like your credit score, whether you prefer cash back or travel rewards and how much complexity you’re willing to take on.

Credit score basics

Your credit score goes a long way toward determining whether or not you’ll be approved for a card, so let’s start there. You probably need a credit score of at least 670 to get most credit cards. I’d feel even better if you’re at 700 or higher. The good news is that the average American’s FICO credit score is 716. You can get your FICO score for free from Experian and Discover (among others).

Even though the FICO formula goes up to 850, as long as you’re around 740 or better, you’re judged to have excellent credit. Hitting this threshold makes you a top-notch candidate for any credit card. There are some exceptions – for example, you might still be turned down due to factors such as a low income or too many recent credit applications – but anyone in the mid-700s and above has very good approval odds.

If your score isn’t as high as you’d like, consider improving it by lowering your credit utilization ratio, signing up for alternative scoring systems such as Experian Boost and getting any credit report errors corrected. You could also build credit with cards that are easier to qualify for, such as a secured credit card or the Petal® 1 “No Annual Fee” Visa® Credit Card.

Cash back vs. travel – which is the right fit?

Besides your top spending categories and your credit score, it’s important to evaluate what you want to get out of the card – namely, cash back or travel rewards. (As a reminder, if you carry a balance, forget about rewards for now and focus on getting the lowest interest rate possible, such as a 0% balance transfer card.)

Our research has found that cash back is the most popular credit card reward. It makes sense – who couldn’t use a little more cash, right? Cash back programs also tend to be simpler than travel rewards. Turning your rewards into a free flight or a free hotel stay can be more lucrative if you measure on a cents per point or mile basis, but maximizing travel rewards often takes more work and requires you to be flexible with your dates and destinations. Plus, there’s the question of whether or not you’re comfortable traveling given the state of the COVID-19 pandemic.

How to maximize your cash rewards

While cash back cards are generally simpler to manage than travel cards, there’s also the question of how many credit cards you should have. For context, the average American has 3.0 bank-issued credit cards and 2.3 retailer-branded credit cards, Experian reports. Personally, I fall on the simpler side of that spectrum (I currently use two credit cards, down from a peak of six), but I know plenty of people who successfully juggle 20 or more cards. It’s a personal choice.

If you want to keep it super simple but still earn solid rewards, I’d suggest a no annual fee card that offers a 2% rewards rate on every eligible purchase. Examples include the Citi® Double Cash Card (which technically gives 1% cash back when you make a purchase and another 1% when you pay it off) and the Wells Fargo Active Cash® Card, which offers 2% cash rewards on purchases.

If you like cash back but want to fare a bit better, use a no annual fee, 2% cash back card as a foundation and layer in another card (or two or three or more) that emphasizes categories in which you spend a lot of money.

For example, you could get 5% cash back on your top spending category each billing cycle with the Citi Custom Cash℠ Card (up to $500 in purchases, then 1% cash back after that). I also like rotating category cards such as the Chase Freedom Flex℠ and the Discover it® Cash Back card. Both of these give 5% cash back on up to $1,500 in quarterly spending on categories the card issuer chooses and changes every three months (activation is required, and after $1,500 in quarterly purchases, additional spending earns 1% cash back).

Make sure you get the most out of your travel rewards

Turning to travel, the best way to maximize value is with a transferable points card. Offerings such as the American Express® Gold Card, the Chase Sapphire Preferred Card, the Capital One Venture Rewards Credit Card and the Citi Premier® Card allow you to transfer your points to a wide variety of airline and hotel partners (among other redemption options). This provides built-in diversification and opens up a lot of potential value.

All of these charge annual fees, but the perks can be well worth it: That’s another thing for you to decide. And all four of those cards have lucrative intro offers. In fact, the Chase Sapphire Preferred and the Citi Premier are currently offering the highest bonuses we’ve ever seen on those respective cards.

Ideally, when you sign up for a new card, you’ll get a nice upfront bonus as well as strong long-term value. You don’t want to open and close too many cards in quick succession because of the potential impacts on your credit score, not to mention that churning cards too aggressively can run afoul of issuers’ rules.

Bottom line

As you can see, choosing the right credit card depends on a variety of individual circumstances. It’s a competitive market and now is one of the best times in history to apply for a new credit card.

Beauty is in the eye of the beholder: To make the best decision for yourself, consider key questions such as how creditworthy you appear to lenders, whether you prefer travel rewards or cash back and how much you value simplicity. Next week, we’ll go beyond rewards and discuss credit card benefits such as travel insurance, extended warranties and purchase protection.

Have a question about credit cards? Email me at ted.rossman@creditcards.com and I’d be happy to help.