I recently applied for a new credit card and was reminded just how confusing the process can be. There are so many options, all with different perks, rewards systems, and fee structures, that it’s difficult to figure out the right one for you. The truth is, the best credit card is different for everyone and really comes down to understanding your own spending habits and financial situation.
Understand your spending
The first step is understanding where your money actually goes. This is important because it forces you to do a bit of a financial audit, but more importantly, it helps you identify your biggest spending categories.
One day in Canada, there will probably be a credit card that lets us pay our rent or mortgage and earn rewards on it, but until that day arrives, outside of housing other substantial spending categories include travel, groceries, transportation, dining, travel, entertainment and recurring bills.
This matters because different credit cards reward different categories. Ideally, you want the credit card that gives you the biggest rewards in the categories where you already spend the most. The goal isn’t to change your spending to match the card; it’s to choose a card that matches your spending.
Different types of credit cards
Once you understand your spending categories, it’s time to understand the different types of credit cards.
Travel credit cards are designed for frequent travelers. These cards reward you with points or miles that can be used for flights, hotel stays, lounge access, travel insurance, and other travel perks.
Cash back credit cards are focused on everyday spending like groceries, gas, dining and recurring bills. Cash back is a type of reward where a percentage of the money you spend is returned to you—typically as a statement credit or redeemable cash. These cards usually offer about one to three per cent cash back on purchases, depending on the spending categories.
There are also low-interest credit cards for people who carry a balance and want to reduce interest costs and business credit cards for managing business expenses.
Key factors to consider
Once you’ve decided which type of card makes sense for you, there are four key things to compare.
Annual fees are the yearly fees credit cards charge for the perks and rewards attached to the card. If your spending is high enough, the rewards can cover the fee and still leave you ahead. If not, a low-fee (typically under $60) or no-fee card may make more sense.
Interest rates matter most if you carry a balance, which means not paying off your full statement by the due date and letting some of it roll into the next month. Because credit card interest is high and compounds quickly, opting for a lower-interest card—usually around eight to 13 per cent, instead of the typical 19 to 21 per cent—can make a big difference in what you pay over time.
Welcome bonus is the bonus points or cash back you receive after spending a certain amount within the first few months. If you have a big expense coming up like a trip, wedding, renovations, or furniture, this is a good way to take advantage of a large bonus.
Rewards rate is how much you earn in your biggest spending categories. You want the card that gives you the highest return on the money you already spend.
Important things to keep in mind
Credit cards are designed to encourage you to spend more and carry a balance, because that’s how credit card companies make money. So be careful not to increase your spending just because you’re using a credit card. The best way to avoid this is simple: pay your full balance every month.
If you do have necessary expenses that must go on a credit card and you can’t pay them off immediately, consider a low-interest card. Rewards and points usually do not make up for paying 20 per cent or more in interest.
Also be careful about managing multiple credit cards or constantly switching cards for points. Managing multiple bills increases the chances of missing a payment, paying extra fees and spending more time tracking everything. For most people, the extra points are not worth the extra complexity.
The best credit card isn’t the one with the most perks; it’s the one that fits your spending habits, costs you the least in fees and interest, and helps you stay financially disciplined.
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