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Credit Cards

 

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Chances are, you've got a credit card or two, and maybe even more than a few. They have become a part of everyday life because of their ease of use and rewards programs. As credit card companies have adapted and improved their credit card programs over the years, an endless number of options have hit the market. Below, we aim to cover the different credit card types, perks, and how to determine which credit card(s) is the best fit.

Resources

CardRatings: We have partnered with CardRatings to help you compare different credit card options, including by specific reward categories, to find the best card that fits your lifestyle.

Essential Things to Consider When Evaluating a Credit Card

With so many options available, it's difficult to know which credit card will best capitalize on rewards or cash back options in your specific circumstance. Here are some of the different factors to consider when shopping for a new credit card.

 

Introductory Offers

 

Many cards carry introductory offers, including a 0% APR interest rate for a set amount of time or 0% balance transfer. Other offer bonus rewards or cash back on certain or all purchases for a time frame. Others waive the annual fee for the first year. It's good to compare introductory offers, but understand what the long-term rates, fees, and rewards are too once the introductory offers end. Opening and closing credit cards affects your credit rating, so it isn't something you want to do to chase introductory offers.

Interest Rate

 

Below, we'll talk about credit card debt as it's becoming an increasingly bigger issue for American households. (Credit card debt recently surpassed an all-time record high of over one trillion dollars.) While we hope you won't carry a credit card balance, we know the reality of life and the different circumstances that happen. Credit card debt carries some of the highest interest rates out there, with interest rates averaging around 25%. If you carry a balance, interest can add up quickly, often faster than the minimum payments account for. So pay attention to what the interest rate is if you are worried budgets could run tight some months.

 

Fees

 

Most credit cards have late payment fees, on top of interest charges, which can vary in amount. Others common fees include:

  • annual fees

  • balance transfer fees

  • cash advance fees

  • foreign transaction fees

  • over-the-limit fees

 

If you like to travel, foreign transaction fees can add a significant amount to your vacation spending. Consider comparing travel specific cards with no foreign transaction fees.

Credit Card Type

 

There are a handful of major players in the credit card industry. Not all vendors accepted all types, and popularity by type can be country dependent. If you travel a lot, check how popular that particular card type is when shopping around for a new credit card. If you travel often and find a less commonly accepted card type with amazing travel perks, it's a good idea to have a backup card of a different type when traveling. Currently, Visa and Mastercard are the most accepted by vendors in the United States.

 

Some organizations have special exclusivity with one credit card type. If you have any interest in going to the Olympics, for example, you will need to have a Visa. Additionally, while some retail branded cards give great rewards and perks for their brand, perks for other vendors may not be as good.

 

Rewards

 

The biggest advantage of credit cards over debit cards is rewards and/or cash back. Different cards offer different rewards, so this is an important factor to consider, depending on which rewards you'll use the most. Your lifestyle and spending habits factor in here, so take the time to explore the different options. Think both about where you spend the most money, and where you would like to have benefits. Some people enjoy if their perks can be used for luxuries like upgrades to first class, because that's not something they'd otherwise treat themselves too, whereas others just want to get the most bang for the buck on things they know they're going to buy. If you are someone that travels a lot, you'll want a card that is flexible and transfers points to lots of travel partners. However, if most of your spending is on fuel or groceries, another card may be more appropriate.

 

Our partner, CardRatings, compares credit cards by category to help you factor rewards with other factors mentioned above. Different categories include:

 

Added Perks

Credit card perks

One of the less commonly understood and used features of credit cards is their additional perks. These perks can include:

  • airport lounge access

  • cellphone protection

  • credit score monitoring

  • extended warranties

  • price protection

  • purchase protection (including theft protection)

  • rental car insurance coverage

  • travel insurance

  • TSA precheck

 

These shouldn't be overlooked, especially when considering what you get for cards that have annual fees. Saving on car rental insurances and from meals every time you're at the airport because you can eat for free at the lounge can really add up.

Cash Back Versus Getting Points

Above, we mentioned rewards as one factor to consider when shopping for a new credit card, along with some of the different categories. With so many options, it might be difficult to decide which route you should take. Some factors to consider when evaluating different options:

  • How much will you spend on this card a month/year?

  • What types of purchases are you likely to make on it?

  • How often do you like to travel?

  • Are you doing a balance transfer where interest rates matter?

  • How likely are you to go through the additional hurdles associated with using points and figuring out transfers/redemptions?

  • Will you be willing to pick which airline you fly on or hotel you stay at based on your points?

Credit Card Cash Back vs Points.jpg

Cash Back

 

Cash back cards are less complex than points rewards. For each dollar you spend, you earn a certain amount back in a cash balance. You can use the credit towards a statement balance, a transfer to your bank account, or in the form of a prepaid credit card. Some cards offer double cash back (a percentage when you make the purchase and another when you pay the statement for it). Others offer higher percentages back on select purchases, such as gas and groceries, and then a standard cashback on other purchases. You may also see a higher percent back on the first set amount of purchases in a year.

 

1% - 2% is the typical range for general cash back rewards, but not all cash back programs are created equal, so compare options before selecting one. Different cards offer different rates and redemption tiers. Our partner, CardRatings, offers side-by-side ratings for cash back credit cards here.

 

If you don't travel much, don't carry a balance, and could receive more back in cash rewards than the card's annual fee, a card with a cash back rewards program is likely the way to go, especially since many have low to no annual fees.

Points

 

Points cards are great options for people who love to travel or travel a lot for work, such as locums gigs. Different cards have different points options, including earning miles for airlines or points towards hotel stays. These cards can be branded to specific airlines and hotel chains or generic to the credit card provider type. Others allow flexibility between multiple redemption options such as airfare, car rentals, cruises, or hotels.

 

Points cards often offer additional travel perks that can make them more favorable for frequent travelers over cash back cards. Some hotel points cards offer free nights per year, while airline cards may offer different perks including:

  • access to the airport lounge for your airline of choice

  • free checked bags

  • seat upgrades

Points cards often have higher annual fees for the additional perks they offer, so make sure you do a cost/benefit analysis to check that you'll earn enough points and use enough perks to at a minimum make up the annual fee for each year.

Option Cards

 

Some cards allow you the flexibility to either use points towards certain rewards (vendor gift cards, flights, hotels, etc.) or choose cash back credits. While the flexibility can be nice, check the redemption requirements. This flexibility may come at the cost of lower cash back percentages or higher points requirements for redemption.

Assessing An Annual Fee

We love credit cards for their rewards programs, which is why many of us pay an annual fee for the privilege of the rewards and other card perks.

 

When looking at cash back versus points, we made the point to assess the annual fee versus the value of the rewards and perks you think you'll actually use each year. The key to this analysis is making sure you actually use your rewards. Studies have shown that a significant percentage of people carry unused rewards.

 

Cash back and points options both typically have use or lose policies where points expire after a certain amount of time. Factor this in when assessing an annual fee versus your spending. If your dream cruise you've saving points towards have a high points value and you don't use the card enough to redeem the points before they expire, the card won't be the best option for you, and you'll have paid the credit card company to watch your points expire before redemption.

Using Credit Cards Versus Having Credit Card Debt

 

Credit card debt in the United States recently joined student loans in the $1 trillion plus debt club. While the average student loan carries an interest rate of around 5%, the credit card interest rates can exceed 25%.

 

Having a credit card for its convenience, rewards, and perks does not mean you have to carry credit card debt. If you have credit card debt, it is one of the high-interest debts we recommend paying off first.

 

When you find yourself overspending on your credit cards and carrying a balance, revisit your budget and adjust to make sure you have enough money coming in each month to cover your credit card balance(s). If you're fresh out of residency and have been using credit cards along with student loans to survive, we understand. Many of us have been there. As soon as you have your attending salary, make your first budget and factor your credit card debt as a priority to pay off, so that you'll later be able to enjoy the rewards and perks credit cards offer.

Understanding Credit Cards and Your Credit Score

 

Credit cards can affect your credit score in a number of different ways as you open, use, and close them. Keep track of your credit cards and how you use them, especially in seasons of change.

 

The five factors that affect your credit score are:

  1. Credit mix

  2. Credit utilization (higher percentage of your score)

  3. Length of credit history

  4. New credit

  5. Payment history (higher percentage of your score)

Getting a New Credit Card

 

Often when you go to apply for a new credit card, the credit card company will do a hard inquiry on your credit score. Hard inquiries can lower your credit card by a few points temporarily (a few months), impacting the new credit portion of your credit score. Several hard inquiries in short time periods can make you look like a high-risk customer, so if you are looking at having a rewards and a point card, it might be worth spacing out opening them, especially if you have a large financed purchase in your near future.

 

While the hard inquiry initially can ding your credit score, having a credit card or credit cards gives you revolving credit to balance installment credit such as your mortgage and student loans, which can increase your credit score by increasing your credit mix.

 

When you open a new card, your length of credit history starts from zero. But it also increases the amount of credit you have available, which lowers your credit utilization. Lowering your credit utilization increases your credit score, and credit utilization accounts for a large chunk of your credit score calculation. A credit utilization under 30% of your total credit limits will help you maintain a better credit score. Some experts say a credit utilization as low as 7% is ideal for top credit scores.

Using Your Credit Cards

 

As mentioned in the previous section, using your credit card(s) in a way that minimizes your credit utilization increases your credit score (Just make sure you don't have a host of high credit limits if you are prone to credit card debt!). The longer you have the new card you just opened, the more it will help your credit score. This is why we recommended comparing the perks and rewards and fees above before choosing which card to open.

 

Payment history is one of the highest weighted factors that go into credit scores, so make sure you make your payments timely every month (and try your best to pay off the balance of each in full). Having even one late payment can be a huge ding to your credit score. If you have multiple credit cards, make sure you track the due dates on each and set up autodraft to avoid late payments and late fees.

Closing a Credit Card

 

Just as opening a new credit card lowers your credit utilization, closing a credit card increases it, which can lower your credit score. Closing an old card to open a new one can greatly impact your length of credit history, especially if you had the previous card for years. It's generally recommended to leave credit cards open even if you no longer use them to avoid these hits, but make sure you factor in the card fees. You don't want to pay a high annual fee for a card you never use. Closed accounts remain on your credit history for ten years, so you'll still have your payment record of while it was open to factor into your score calculation.

Side Gig and Business Credit Cards

 

A question we see often in our Physician Side Gigs community is if members should have a separate credit card for their side gig or business. Our answer is generally yes. Having a separate card you use exclusively for business expenses makes it so much easier to do your self-employed finances and track the expenses you can deduct. Even if you currently operate without a business entity as a sole proprietorship, it can still be worth it for this perk alone. If you were ever to be audited by Uncle Sam, having separate statements and accountings of your business/side gig finances versus your personal makes the process a lot easier. Just make sure you aren't redeeming the business card rewards or perks personally without treating them as owner draws! Keeping this in mind, make sure you select the right kind of rewards. For a locums or speaking side gig, a travel card could still be useful if your travel isn't completely covered. For a private practice, you might want a cash back option instead. Check out CardRatings' small business cards here.

CreditRatings Disclaimer: Physician Side Gigs has partnered with CardRatings for our coverage of credit card products. Physician Side Gigs and CardRatings may receive a commission from card issuers.

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