There are lots of reasons to choose and use a new credit card, and learning how to choose a credit card that’s right for you is half the battle. The worst thing to do is apply for a card because you’re desperate for some extra cash or because it looks good, but you haven’t read the fine print, so you have no idea what’s going to happen to your interest rate in six months.
So, congrats! You’re already well on your way to earning rewards, improving your credit score, or unlocking better purchasing options for your everyday life
Why Apply for a New Credit Card?
People want to learn how to choose a credit card for lots of reasons. You might be trying to rebuild your credit score after some rough breaks. Maybe some health bills have gone to collections, you’ve discovered mistakes on your credit score, or you had a partner leave you hanging with the payments on a vehicle.
Whatever the case, you’re looking to rebuild your credit score--and a new credit card is a great way to do that. However, you don’t want to make your situation worse, so identifying the right kind of card for you is imperative.
Rebuild Your Credit Score (or Grow a Nonexistent Score)
Rebuilding your credit score might not be your only reason for learning how to choose a credit card. You might need to simply build a score that’s not high due to short credit history. Maybe you’ve never had a credit card but you know you’ll want to purchase a house soon, and you want a better credit score so you’ll get a better mortgage rate.
In this case, you’ll be looking for a slightly different kind of credit card than you would be if you were rebuilding your score; keep reading to learn more about the kinds of questions you should be asking.
Make Safer Purchases
Maybe you’re not concerned about your credit score; maybe you just like using credit cards for your purchases. They often provide a better layer of fraud prevention and identity protection than your debit card, and because they’re not linked to your debit card, if your information gets stolen, the thief can’t clean out your bank account.
Credit cards can also be useful when you’re traveling; more and more places throughout the world take major credit cards, which means you won’t have to go through the arduous task of exchanging currency.
Fund a Trip or Earn a Reward
You might also plan on using a credit card for a major purchase, like a trip or home improvement or for funding a small business. In that case, your priority will be interest rates--more on that in a second.
Finally, you might want a credit card for the rewards, whether that’s cash back, airplane miles, hotel points, or other.
Whatever the case, your goals for your credit card determine the kind of credit card you apply for. There’s no perfect credit card for everyone--but there is a perfect credit card for you and your situation.
Here’s What You Need to Know About Your Credit
To make sure you get the best credit card for you, you need to understand how credit works. This will help you learn how to choose a credit card.
What Kind of Score?
First of all, what is a credit score and why does it matter? A credit score is a little like a grade at school, but it doesn’t tell whether you’re good at making money; it simply tells credit bureaus whether or not you have a history of paying off your debts. This history allows money lenders like credit card companies to determine how much of a risk you are. The lower your risk of defaulting on your debts, the better the incentives they’ll offer because they want you as a customer.
If your score is low enough, there’s a chance you won’t be approved at all for certain cards--or any cards. If you think that might be the case, there’s a way to rebuild your score safely, and we cover that in a few sections.
How Do I Know What My Credit Score Is?
It’s important to know what your credit score is before you start shopping for the best cards since your score will determine what you’re eligible to apply for. No sense in wasting time applying for what you won’t be approved for!
There are many different ways to check your credit score (and many different reporting agencies that report slightly different scores; small variation is fine). If you’re reasonably sure what your credit score is, you can apply to the card that you want; they’ll supply you with a free FICO score.
By federal law, all three major credit reporting bureaus (TransUnion, Experian, and Equifax) are required to offer you a free credit score annually. You can also purchase additional scores more frequently.
If you want your annual free credit report, you should go to this federally approved site: AnnualCreditReport.com. Be wary of other sites and links, as scams are rampant!
What’s a Good Credit Score?
The scale each credit bureau--and often some lenders--uses varies from company to company, but typically your score will sit somewhere on a range that goes from about 300 to about 850.
Again, each credit card has different requirements, and a good credit score to one might be a poor credit score to another, but here’s the typical range:
- Bad: 300-629
- Fair or Average: 630-689
- Good: 690-719
- Excellent: 720+
If your credit score falls in the good or excellent range, you’ll have a much better chance of being approved for the card you apply for, no matter how good it is. If your credit score falls into the average range, your chances get slimmer; if your credit falls in the bad range, your chances are extremely low, but not nonexistent.
What Do I Do If I Don’t Like My Score?
So, you ran your credit score, and you don’t like what you saw. Maybe it falls just shy of good, and you want to nudge it up just ten points. Maybe it’s close to bad, and you realize you have a lot of work to do.
Here are some steps to take:
- Check for errors. If a bill hit collections even though you paid it immediately, it could be hurting your credit. You’ll need to call the credit agency to work through fixing these errors. It’s important to note that this isn’t a quick process--make sure you get your credit report far in advance of when you want to apply for a credit card to make sure there’s enough time to fix things.
- Stop paying bills late. Late bills ding your credit; pay on time, especially when it comes to mortgage payments and car payments. Plus, just imagine how much you’ll save in late fees!
- Take out more credit. Borrowing money and then paying it off before it’s late is one of the best ways to build your credit score. Make sure you don’t spend what you’re not able to pay off, however, since late payments will hurt you more than the extra credit helps! We’ll explain below what kinds of credit cards to look for if you’re trying to build your credit score.
- Start early. We’ve already mentioned this, but payment history over time is another huge factor when it comes to building a positive credit rating. This is a long-term game, so don’t wait till the last minute!
- Keep a credit card balance, but not more than 30% of available credit, and make sure you’re making payments on time. This is a good way to fast-track (as fast as possible, that is) credit score building, but it can also be expensive if your current cards don’t have good interest rates, so it’s not always worth it.
- Monitor your score regularly, but make sure you’re using scores from the same bureau, so you’re not confusing your results. This will help immediately spot a problem so that you can be proactive about fixing it.
I’m Ready to Apply for My New Credit Card!
Alright, so you’ve spent the last year monitoring your credit score, paying off whatever was in collections, getting errors fixed, and making one time payments on your existing cards. Your credit score has improved, and you’re ready to apply for your new card. Congratulations!
Now it’s time to figure out how to choose a credit card that will get you further to your financial goals, which we explained in our earlier section--are you looking to earn rewards, improve your credit score, or make traveling easier?
Rebuilding Your Credit Score
If you want to rebuild your credit score--or build it--and your credit score falls in the bad range, consider applying for a student credit card or a secured credit card.
Secured credit cards require upfront deposits (some as high as $200 or even more), but will repay these deposits when you graduate out of needing a secured credit card or when you close your account and are still in good standing (make sure you read the fine print, so you understand what rules disqualify you from being in good standing!).
Student credit cards are unsecured, but typically have very low credit limits and are designed for people with low scores--i.e., students who haven’t been able to build a credit score yet.
Saving Money on Interest
If you’re building your credit score but want--and can apply for--something with a higher credit limit than a secured credit card or a student card, your priority will be a low-interest rate. You can also check the availability of and cost for a balance transfer.
Make sure you pay special attention to the introductory offer: cards will often hike rates or charge annual fees after the introductory fee is over; you don’t want to be caught unaware!
You might also consider moving debt on a high-interest card to a low-interest card; depending on the rates and offers, you could stand to save a great deal of money.
The most fun reasons to use credit cards are, of course, the rewards! While some credit unions offer cash back for using their debit cards, most of the time you’ll get much more cash back using a credit card designed for the purpose. You can also accumulate airline miles, travel points for hotel stays and restaurants, and much, much more. The better your credit score, the better your rewards will be, so it pays to take the time to build a strong score.
Often, rewards cards charge some kind of annual fee or have a high APR, but the sign-up bonuses and rewards you get can be substantial. Our recommendation is to think about the expenses you want to put on your credit card and estimate how much you’ll spend in the course of the year.
The key here is planning: don’t guess; instead, pay close attention to what you normally spend in a year and any large expenses you’re planning on purchasing.
Then, carefully review the card you have in mind. Make sure you won’t have to make more purchases than you’re already planning on to reap the card’s rewards.
Don’t forget to pay careful attention to the following:
Once you’ve done your homework, learning how to choose a credit card is a cinch, and can help you lower your interest rates, improve your credit scores, and earn rewards. Happy spending!