A Five-Step Guide to Choosing the Right Credit Card
The average American consumer has four credit cards and applies for a new one every two to three years. Since most people are overwhelmed with countless offers, they often seek help figuring out how to choose a credit card.
Whether you already own and use different credit cards or you are just starting to build your credit history with the help of the right card, you’re sure to pick up some useful tips from this guide.
Finding the perfect credit card isn’t easy, but it isn’t rocket science either. To ensure that you’ve made the right choice, take the time to review your spending habits, understand diverse types of credit cards, prioritize your goals, and apply only for the cards that check all the boxes.
Here’s a step-by-step guide on how to pick the best credit card, irrespective of your objectives. So, it’s time to ask yourself “What credit card should I get?” and embark upon an in-depth assessment of your needs as they fit in with your financial capabilities.
Step 1: Check Your Credit
While the majority of the best-rated premium cashback and travel rewards credit cards are reserved for consumers who have excellent credit, there are still abundant options for those of us with imperfect credit histories.
Banks have tailored offerings to meet the needs of every segment of the consumer market. No matter who you are or what your credit history is, there’s a card out there for you.
Because your credit profile will significantly affect your odds of approval and the kinds of cards you are eligible for, it’s best to know where you stand.
Before you begin gathering information on how to pick a credit card and start submitting applications, you should take the time to check your credit score and figure out what offers you qualify for.
Here are the general rules that will apply based on whether your FICO score is poor, fair, good, very good, or excellent:
- If your credit is poor (579 or lower) or fair (from 580 to 669), your options are probably limited to secured credit cards and cards that are intended for people with bad credit.
- With good credit (670 to 739), you’ll probably be able to qualify for all of the market’s best credit card offers, except for premium cards.
- If your credit is very good (740 to 799) or excellent (800 or higher), you should be able to meet the eligibility requirements for almost any card you apply for.
By federal law, every year, consumers are entitled to one free copy of their credit reports from each of the three bureaus - Experian, Equifax, and TransUnion. Options to get your reports include visiting the federally authorized website annualcreditreport.com and getting in touch with the credit reporting agencies directly.
If you have had credit problems in the past, your score may not look as good as you hoped, and your chances of qualifying for the most appealing credit card deals may be slim. That’s why it’s important to go through each credit report in detail to figure out what’s causing the issue.
Check for errors, make sure to dispute them with the credit bureaus, and work on improving your spending habits.
You should also keep in mind that you’ll face a “hard” credit check each time you submit a credit card application. Unlike a “soft” credit pull, a hard one may lower your score by a few points. The fact that a vendor has inquired about your score will remain on your report for approximately two years.
Applying for a few new credit cards and sustaining several hard credit checks over a short period could hurt your chances of qualifying for credit cards in the future. To avoid this issue, you should apply only for the cards that come with decent approval odds for people with your credit profile.
Luckily, many credit card issuers offer prequalification features that you can use to obtain valuable information before deciding whether to proceed with your application.
Step 2: Decide Which Type of Credit Card Fits You Best
After you have gained some insight into your creditworthiness, the next important step in choosing a credit card is to learn how these financial products work so you can decide which type is best for you. There are three types of credit cards based on purpose:
- Credit cards that help you establish or rebuild your credit score
- Cards that earn rewards on eligible purchases
- Cards that help you save money
Once you figure out the main reason you need a credit card, narrowing down the options will be much easier. A student who is establishing credit for the first time won’t need the same type of payment card as a frequent traveler who wants to collect bonus miles and redeem rewards.
Building or Rebuilding Credit: Student Cards and Secured Credit Cards
If you don’t know how to choose a credit card because you have a limited credit history or you need to correct past mistakes and rebuild your profile, bad-credit credit cards are a good starting point.
Student credit cards, unsecured accounts designed with new-to-credit college students in mind, are among the easiest cards to qualify for.
So is a secured credit card, which works exactly like an unsecured credit card but requires a security deposit of at least $200.
The good thing about secured cards is that you can get your deposit back - along with an opportunity to upgrade to an unsecured card - in as little as six months. Just remember to pay your bills on time.
Earning Rewards: Travel Rewards and Cash Back Credit Cards
The best credit card to apply for if you want to benefit from paying your balance in full each month is a rewards credit card. These cards usually have higher-than-average fees and interest rates, but they often offer generous sign-up bonuses.
These cards let you earn miles, points, or cash back on each dollar you spend. Consumers who prefer cash rewards mostly opt for cashback credit cards, while frequent flyers typically choose travel cards.
Saving Money: 0% APR, Low-Interest, and Balance Transfer Credit Cards
If you have irregular income or you’re making major purchases, you may not be able to pay your entire balance each month. Perhaps you plan to get a credit card to use in emergencies.
In these cases, a card with a 0% balance transfer intro APR and a low ongoing interest rate would be a smart choice.
A balance transfer card can be a good option for consumers who need help repaying some or all of their high-interest debts with a single monthly payment. Owing to balance transfers, these consumers can simplify and streamline their finances.
Nevertheless, keep in mind that 0% APR credit cards and low-interest credit cards won’t be easy to qualify for unless you have good credit.
Step 3: Consider Credit Card Rates and Fees
Once you’ve checked your credit score and settled on a card type that best fits your needs, it’s time to browse through current credit card offers and compare interest rates, credit limits, annual fees, and penalties.
Credit card offerings express the sum of interest and fees as a single number - the average percentage rate.
The APR tells you the true cost of a card so you can compare a high-interest account that has no fees with a card that charges a lower interest rate but imposes a monthly maintenance fee.
The APR can be fixed or it can change from month to month based on the prime rate or another financial indicator. Even a fixed interest rate can change if you go over your limit or make late payments.
Variable-rate credit card offers are more common than fixed-rate options.
The interest rate is less important if you plan to pay your balance in full each month. However, if you’re going to carry a balance - if you’re using your card for debt consolidation, for instance - it’s important to understand how the charges are calculated.
Your credit limit (or credit line) is the maximum amount of money a credit card issuer is willing to lend you. It depends on the card type and the cardholder’s credit history. It can be anywhere from a few hundred to tens of thousands of dollars.
Remember that you should stay away from maxing out the limits on your credit cards. Not only will you have to face penalties if you exceed your credit limit, but you’ll increase your credit utilization ratio and thus lower your credit score.
There’s a variety of ways a credit card issuer can make money from customers. Some of the most common charges include an annual fee, a balance transfer fee, cash advance charges, and foreign transaction fees.
You may also face charges if you make a payment by phone or request an increase in your credit limit. Additionally, if you pay your bill late or exceed your credit limit, you’ll have to pay penalty charges.
Now you know how to choose a credit card for the first time. It’s actually quite simple. It’s best to compare multiple offers and then look for options with reasonable fees. Be sure to understand all the terms and conditions before you accept a card.
Step 4: Compare Card Benefits
Banks do their best to attract new clients with special promotions for new customers. Most of these offers are less important than other factors, but some of them are quite appealing and could lead to choosing one card over another.
From generous welcome bonuses to lucrative rewards programs and free credit monitoring, there’s a long list of additional features you may be offered when selecting a credit card. Here’s an overview of the most common benefits that you should consider.
If you choose a rewards credit card, you’ll be offered valuable bonuses in various categories. Look for a card with a flexible rewards program that makes it easy to earn and redeem bonuses.
Choosing an option that fits into your consumer habits will help you boost your savings because you will earn more points on exactly those categories where you spend the most: airfare, dining at restaurants, online grocery purchases, gas stations, streaming services, and other purchases.
The best credit card companies offer flat-rate rewards (miles, points, or cash back) such as 1% or 1.5% on all purchases - plus an opportunity to earn higher rates (up to 5%) in specific spending categories.
To make the best of your credit card strategy, you should be careful to use your card consistently when making purchases in spending categories that will earn you the highest rewards. You should also be familiar with any limitations that are part of your credit card account terms and conditions.
For example, some issuers may require you to earn bonus points up to a certain minimum amount before you can start redeeming them.
Higher-tier top-rated credit cards also offer lounge access, annual credit checks, additional perks from brand partners, and the opportunity to achieve elite status with your favorite airline companies or hotel chains.
Although many of these perks that come on top of rewards structures may sound appealing, make sure to choose a card that offers features you are likely to use.
A travel rewards credit card that offers you airline and hotel upgrades during vacations may be appealing, but it doesn’t save you any money unless you would have otherwise paid for those upgrades.
A sign-up bonus is another feature of the best credit card deals. Available only to new cardholders, these welcome offers have specific requirements, such as spending a certain amount within the first few months after account opening.
These benefits can translate into real money. For example, a card could offer a $300 bonus if you use it to make at least $1,000 in qualifying purchases during your first three months as a cardholder. Keep in mind that not all rewards cards offer such incentives.
Reporting to Credit Bureaus
If you’re looking for advice on how to choose a good credit card for building or rebuilding credit, don’t worry. Every credit card issuer reports your activity to at least one of the major consumer credit reporting bureaus: Equifax, Experian, and TransUnion.
Companies report derogatory information if you are late with monthly payments, but a history of making timely payments can help you boost your score. It makes sense to opt for a card that reports to all three bureaus.
Free Credit Score Monitoring
Many card issuers provide free credit-score tools that help you stay up-to-date with your credit profile. These tools are a simple way to check if your score is rising or if there has been fraudulent activity on your account.
If you are not sure how to choose a credit card when a secured solution is your only option, look for a card with graduation opportunities. If you select a secured credit card with the option to graduate, you’ll be given your security deposit back along with an opportunity to upgrade to an unsecured card in six months to a year.
The best thing about this feature is that you won’t need to cancel your card and apply for a new one to complete the process.
Step 5: Apply for the Card With the Highest Overall Value
After you’ve identified the desired features, you may feel ready to submit applications. Before you do, take a moment to read the below advice on how to choose the best credit card.
Protect Your Credit Score
Applying for multiple credit cards that may turn you down is risky. Denials show up on your credit report and reduce your score. That’s why you should choose a credit card designed for your situation and continue working to improve your score.
Opt for a Low APR or a Rewards Program
Setting your priorities is important. If you have credit card debt to pay off, find the balance-transfer credit card with the lowest rate and forget about bonus points. Once you are sure you can pay your balance in full each month, you can switch to a rewards credit card without worrying about the high APR.
After all, the best credit card should be the one that helps you simplify your financial situation instead of making it more complicated.
Look for Hidden Fees
Before you finalize your credit card application and sign the contract, be sure to read the fine print. No matter how customer-friendly a credit card company may seem, remember that its main objective is to make a profit.
There’s nothing wrong with that, but it’s important to find a card issuer that is fully transparent about all the fees it may charge you.
In addition to annual membership fees and transaction costs such as balance-transfer and cash-advance fees charged by some major credit cards, options may also include inactivity fees, closure costs, penalty charges, monthly maintenance, and paper statement fees.
Glossary: Basic Credit Card Terms
The annual percentage rate is the total fees and interest you’ll be charged, all expressed as an annual rate. You won’t owe any interest if you pay your balance in full each month, but your card still has an interest rate.
Credit card fees are additional costs separate from the interest rate. These include an annual membership fee, cash advance charge, foreign transaction fee, and late-payment penalty.
The smallest piece of your debt you are required to pay your credit card issuer each month is called the minimum payment.
Even the best credit cards have these requirements, and,should you miss your minimum payment, you will incur late-payment fees. Moreover, your tardiness will be reported to the big three credit bureaus, so your FICO score could take a hit.
When you apply for a card, be sure to look at additional perks. Usually available on premium cards, these include TSA precheck privileges, airline fee credits, airport lounge access, travel insurance, and rental car discounts.
Tied to how much you can spend on purchases on your credit card, rewards usually come in the form of miles, points, or all the cash back that you can redeem and use in multiple ways.
When you are applying for a credit card, keep these rewards in perspective. Many are convenient but not valuable enough to justify a higher APR.
Designed to persuade new customers to sign up for a rewards credit card, these bonuses typically require you to meet a specific spending requirement to receive cash back, bonus points, or frequent flyer miles.
How do I choose a credit card for the first time?
At the outset, take a look at your finances and check your credit score. Then, decide which type of credit card you need and can qualify for. Afterward, consider the APR, card fees, and credit limits. Finally, make sure to look at additional benefits of the top credit cards you are eligible for.
With these factors in mind, apply for the card that offers the highest overall value for you.
What kind of credit score do I need to get a credit card?
While the best credit card offers are reserved for applicants with higher scores, there are options for consumers with imperfect credit histories. Poor- and fair-credit applicants can opt for credit cards for bad credit, secured cards, and student cards.
Those with good scores are eligible for rewards credit cards. And consumers with excellent credit can qualify for just about any card on the market.
What credit card builds credit the fastest?
The best credit cards for beginners who are new to the credit world are secured cards and student cards. Both are easy to get, and as long as you use them responsibly, they’ll help you qualify for options with lower rates and a longer list of additional perks in no time.
Note that the best credit cards for building credit are the ones whose issuers report information about your payments to all three major credit bureaus.
How many credit cards should I have to build credit?
You could be better off without any credit cards at all. But if you want to build a healthy credit history with a good score, cards can come in handy.
If you are wondering how to choose a credit card for the first time, remember that you should focus on what you need rather than on what you want. Pick an option that won’t make your financial situation unnecessarily complicated.
Experts say most people should have three cards: two they carry to make everyday purchases and one held in reserve for unexpected expenses.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
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