Credit is credit, right? Wrong. Depending on your spending habits and creditworthiness, you can save thousands of dollars a year by choosing the right card. Not all credit cards are equal, so it is crucial to know how to choose the right credit card.
Unfortunately, identifying the best options and managing your credit card responsibly can be overwhelming. But don’t fret. Here are some useful tips that will help you choose the right credit card and make the best of your new piece of plastic.
Step 1: Check your credit score
Most credit card issuers have a minimum FICO score they’re willing to consider, but refrain from disclosing the exact figure. However, the higher the credit score, the greater your approval odds. Plus, you could possibly qualify for cards with lower APRs, minimal fees and lucrative incentives since they cater to individuals with higher FICO scores.
Where can you find your FICO score?
You can retrieve your FICO score from the following sources:
- Annual Credit Report
- Credit bureaus (Experian, Equifax or TransUnion)
- Free credit monitoring services
- Bank statements and online portals (if offered as a service to account holders)
The score you see may vary from what the credit card issuer uses when evaluating your application because each creditor uses a unique algorithm.
You should also review your credit report, even if your score is up to par, to confirm the accuracy of all the data listed. Remember: the higher your credit score, the better.
(SuperMoney Tip: Use an online tool like CreditSesame to check your credit score.)
Step 2: Determine which type of credit card suits your needs
Use an online tool that lets you explore credit cards by category, and provides a thorough overview and unbiased consumer reviews for each card.
Don’t know where to start? SuperMoney has you covered.
There are several types of credit cards to choose from, including:
- Rewards credit cards – They offer gas, retail, airline, lodging and cash back incentives to cardholders. An enticing introductory offer, such as free airline miles or hefty cash back bonus within the first few months as an account holder, may also be available. (Related – How to make the most of credit card reward programs)
- Low interest credit cards – Available for those with stellar credit history.
- Balance transfer credit cards – They cater to consumers who want to avoid interest while axing existing credit card balances. Cardholders have assessed a fee for the transaction, but can take advantage of an interest-free period on the amount transferred.
- Student credit cards – They are designed for college students who are just starting out in the credit world. The barriers to entry are fairly low, so don’t expect to receive a large credit limit from inception.
- Secured credit cards – Ideal for those who are rebuilding their credit. The credit line is typically equal to the amount of the deposit, which is also used as collateral, required to open the account. It’s possible to convert to an unsecured credit card if responsible card use is demonstrated over a period of time.
- Bad credit cards (unsecured) – They are also geared towards consumers with tarnished credit history. Since there’s a greater risk to the creditor, expect to fork over an exorbitant amount in fees and interest.
Learn the lingo
Credit card issuers love to toss credit lingo around, so it’s best to familiarize yourself so you understand the information tucked away in the fine print.
Some terms you should know:
- Annual Percentage Rate (APR): the rate that determines how much interest you will pay on purchases
- Grace period: the period you have following a purchase until interest accrues
- Annual fee: a flat fee assessed each year to use the card.
- Over-the-limit fee: an amount charged each time the balance exceeds the credit limit
- Foreign transaction fee: a fee incurred by consumers when purchases are made abroad
- Balance transfer fee: a flat-fee or percentage assessed when the cardholder transfers an outstanding balance from another credit card
- Cash advance fee: a fee incurred when funds from the available balance are withdrawn from the ATM machine
- Promotional period/Introductory offer: a specific time frame that allows cardholders to take advantage of special promotions, such as no APR or bonus rewards
- Minimum payment: the amount that must be paid each billing cycle for the account to remain in good standing. According to Bank of America, the minimum is equal to one percent of the outstanding balance plus interest and fees.
- Credit limit: a preset spending limit set by the credit card issuer.
Step 3: Assess the qualification criteria
Once you’ve narrowed down your options, the next step is to determine if you have a shot at qualifying. Several credit card issuers, including Capital One, Citi, Discover and Bank of America, have pre-screening tools on their website. Inquiries do not impact your credit score, but you will be asked to enter your name, address, date of birth and social security number to generate results.
Step 4: Pare down your list of options
It may be tempting to apply for a credit card that offers a generous introductory offer or enables you to earn a large sum of airline travel miles. However, that doesn’t mean the myriad of benefits received will outweigh the costs, especially if you don’t take full advantage of the perks being extended to you.
Run the numbers
How much will purchases cost you if the balance is not paid in full before the grace period ends?
To illustrate, if you spend $1,000 on a card with an APR of 19.99 percent and only make the minimum payment of $25 each month, it will take you 127 months to eradicate the balance. To add insult to injury, you’ll flush $1,195.59 of your hard-earned dollars down the toilet in interest. This may not seem like much, but the interest payments add up as the balance increases. (Source)
You should also determine if the earning potential is greater than the annual fee. If the card is offering a sign-up bonus valued at $100 if you spend $3,000 or more in the first three months, the card won’t be worth your time if the annual fee is $95 and you know it’ll be difficult to meet the minimum spending requirement.
Or if the card has a lucrative rewards system that you’ll never actually take advantage of, why bother throwing away money on an annual fee?
Explore cardholder protections
Does the card offer personal, shopping and travel protections for cardholders?
They may not seem like a big deal but could save a wad of cash in the long run. For example, you could deny insurance coverage on your next rental car or opt-out of that costly extended store warranty when purchasing your next laptop.
Determine if the card is right for you
Once you’ve run the numbers and explored cardholder protections, here are some additional factors, by card type, to help you choose the card that best suits your needs:
- Rewards credit card: Is the minimum spending threshold low enough for you to earn the introductory incentive the card is offering? Can the points be redeemed for something you’ll actually use? Is the earning potential capped at a certain amount?
- Low-interest credit card: If the card is accompanied by an annual fee, are there any other incentives to make the cost worthwhile? (This is particularly important for cardholders who will not carry a balance).
- Balance transfer credit card: Is the card accompanied by a zero percent APR for balance transfers? Does the credit card issuer offer online tools to help you devise a plan to pay off the amount transferred before the introductory offer expires? Is the annual fee excessive?
- Student credit card: Does the card offer flexible payment due dates? Are late payment penalties waived for the first offense? Will you be considered for a credit limit increase after demonstrating responsible use for an extended period of time? Is the APR fairly low, compared to other cards on the market?
- Secured credit card: Will you be afforded the opportunity to upgrade to an unsecured product if you exhibit proper debt-management practices? How much is the required deposit, is it equivalent to your credit limit, and will you earn interest? Most importantly, does the card issuer report payment activity to the credit bureaus? (If not, it’s the equivalent of a debit card with hefty fees and will not help you improve your credit)
- Bad Credit Student Credit Card: Does the card issuer offer more enticing credit card products that you could be considered for after a year or so of responsible use? Are there high annual and administrative fees?
Step 5: Submit an application for the best option
Credit card applications can be completed on the credit card issuer’s website or by calling the customer service department. Once submitted, the information is analyzed through an electronic system and a decision is usually rendered in a minute or less.
If you receive a notification that states the application is under further review, you can call the customer service department to inquire or wait for a credit decision to arrive in the mail. In some instances, it could take several weeks to learn the status of your application. (Source).
Got an approval! Now what?
When you’re new to the wonderful world of credit cards, it’s easy to get in over your head by spending on items you can’t afford. Even worse, a simple mistake can have a devastating impact on your credit rating for several years to come. Below are some tips to steer clear of potentially costly newbie mistakes:
Keep credit card balance(s) low
Approximately 25 percent of your credit score is determined by the amounts owed on your outstanding debts. If there aren’t a ton of entries on your credit report, the impact could be even greater. Most financial experts recommend that you keep your debt to available credit utilization ratio below 25 percent (Source – Duke University). Even better, only charge what you can afford to pay off before the grace period lapses and interest kicks in. That way, you won’t have to worry about interest charges, fees and debt utilization ratios at all.
Make timely payments
A single late payment reported to the credit bureaus can ding your credit score by 100 points or more, no matter how small the amount. And the higher your credit score, the harder the hit. Fortunately, credit card issuers won’t report late payments until the account is at least 30 days delinquent. So, a payment that’s a day late will only cost you a late fee, but there’s still time to sort things out before your credit score is damaged.
Only apply for credit as needed
Each time you apply for a credit card, a voluntary inquiry, which decreases your score by up to five points, is generated, says myFICO. Credit inquiries also remain on your credit report for 24 months although the impact is non-existent after the first 12 months. Furthermore, having an arsenal of credit cards is a recipe for disaster if your spending is out of control.
What to do if your application is denied?
If you’ve worked all the credit kinds out and the items in your credit report are both accurate and timely, it may be best to take a break from credit card applications. To pass the time, implement these tips to boost your credit score and reapply once your score improves.
Good luck, and happy shopping for the credit card that is right for you.