3 Rules for Choosing a Credit Card, According to Ramit Sethi
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Gabriel Vito
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Jenna Klaverweiden
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Choosing the right credit card for your unique financial situation doesn’t have to be complicated. In an article, money expert Ramit Sethi shared his three top rules for choosing a credit card that’s right for you.
Whether you’re a newcomer to the world of credit or an experienced user looking to optimize your travel rewards, these rules can help enhance your understanding of credit card strategies and help you make informed choices that align with your financial goals.
Choose the Best Card You Can With Your Credit Score
According to Sethi, the first rule of choosing the right credit card is to start with a clear understanding of your credit score. This score plays a crucial role in determining your eligibility for various credit cards and sets the stage for your next steps.
With a credit card, you should prioritize clearing your balance over accumulating debt, as this practice will steadily improve your credit score. Start with a credit card that matches your current credit status and use it to build a strong credit history.
Equifax, one of the three major credit bureaus, recommends paying off your credit card in full whenever possible to avoid interest charges and prevent a high utilization rate from negatively affecting your credit score.
Working to improve your credit score will help you qualify for better credit cards in the future.
Choose Simplicity or Maximization
Once you’ve achieved a good credit score, Sethi suggested that your next decision is to choose whether you want to prioritize simplicity or maximization of rewards and perks with your credit card.
This choice requires self-awareness about your spending habits and what perks you value in a credit card.
Opt for Simplicity
If ease of use is your priority and you prefer not to manage complex rewards systems, choose simplicity and consider a straightforward option. Sethi recommended a cashback card, where you’ll get a percentage of cash back on purchases.
According to Chase Bank, some of the pros of cashback credit cards are low annual fees, introductory annual percentage rates and sign-up bonuses.
It’s ideal for those who value simplicity and want consistent rewards without any extra effort.
Maximize Your Rewards
If you aim to get the most out of every dollar spent, a travel rewards card can be more advantageous. “These give you points for every purchase that you can redeem for airline tickets, hotel nights and some retailers,” Sethi said.
According to Experian, travel credit cards could lower your travels costs, make travel more enjoyable and provide you with more travel insurance benefits, like covering expenses if a trip is canceled or a bag gets lost.
These cards are well-suited for frequent travelers who are willing to manage a more complex points system to gain higher value from their spending. In choosing between these types of cards, consider how often you travel. Travel rewards cards provide excellent value for frequent travelers but may offer less utility for those who rarely travel, making cashback cards a more beneficial option for their everyday spending.
Factor In the Number of Cards You Already Have
Effectively managing the number of credit cards you own is crucial for maintaining a healthy credit profile. Sethi recommended starting with one card when you’re building your credit in order to simplify your financial management and avoid the complexity of multiple cards.
If you can qualify with your credit score, he suggested a general rewards card that meets all your needs — either a cashback card that offers a high return on all purchases or a travel rewards card with a solid points program and good perks. This approach can help you manage your finances more easily and build a solid credit foundation.
As your credit score improves and you feel comfortable with your first card, consider whether adding a second or third card could be beneficial. Using different cards for specific spending categories like fuel and travel can maximize rewards. Additionally, cards from different issuers can offer flexibility in points transfers, which is useful for booking travel with various partners.
According to Equifax, having more cards can indirectly impact your credit score because you can lower your debt-to-credit ratio. Good credit usually requires a credit utilization rate below 30% — which requires responsibility and self awareness to maintain.
The most important thing to remember is to keep your balance low and keep track of what you owe, so opting in for more than one card in your arsenal may be a better decision if you’re experienced with handling one card first.
It’s still important to maintain simplicity in your credit strategy, according to Sethi. The effort involved in managing multiple cards, such as tracking rotating points categories and chasing sign-up bonuses, can complicate your financial life more than the benefits they provide. Keeping to a few strategically chosen cards will streamline your financial management and keep your credit health robust.
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