Follow These 6 Steps To Pick Your Next Credit Card
On the hunt for a new credit card?
Well, before you fill out that application, we have 6 important factors you need to consider.
But before we get into that, let’s set the stage.
Credit cards are a double-edged sword. They can help build up your credit and earn you some sweet rewards and long-term savings. Or they can cripple your financial health and put you deep into debt.
Their impact, both positive and negative, is quite real. Additionally, your credit score defines the interest rates you can get for:
- Business Investments
Even employers review your credit before hiring these days.
That's why picking a card is not a task you should take on lightly. It’s a long-term commitment that could have a significant effect on your financial future.
So let’s get into how you can pick the best card for yourself.
Get What You Need and Get Out
A consumer survey from The Motley Fool found that the #1 influencing factor in selecting a credit card was to build credit history.
But when credit cards come in many shapes and sizes, what card should you choose? Well, certain spending habits and activities may lend themselves well to a particular type of card (see below).
Which of these sounds most like you?
- Something to help me pay for things over time ⟶ Look for cards with low interest, manageable minimum payments and long grace periods.
- Focused on building credit ⟶ You want to focus on cards you can pay in full each month with no annual fees and single-cycle billing
- Flexible day-to-day purchases ⟶ Select cards with high credit limits and high yield cashback or rewards programs
- Emergency Coverage ⟶ You want a basic card with low interest and fees. Consider personal loan alternatives as well.
What Cards Are in My Credit Range?
I hate to break it here, but if your credit score isn’t 690+, those fancy rewards programs and 0% APR probably aren’t in the cards (pun intended).
But that’s ok.
You can build up to that.
What you don’t want to do is waste your time and hurt your credit score.
Rejections will impact your score and stay on your record.
So, after determining how you’ll use a card, you need to find the cards for your credit level.
You may need to go with some starter card options to grow your credit until you can get the one you want.
Building credit is a marathon, not a sprint.
The X Factor
After you have the right type of card in mind, this next piece is the most important of all:
Annual Percentage Rate (APR) is the annualized interest rate and fees you pay every month depending on the amount of debt you hold. If you pay off your card every month, you have nothing to worry about. That said, if you are like the majority of us that hold some amount of credit card debt, APR affects how much your debt load will grow every month from interest and fees alone. This is where banks make most of their money.
According to Debt.org, credit card loans crossed the $1 Trillion mark in Q3 of 2019 reaching $1.08 Trillion. Additionally, the average American household has 4 credit cards and owes just shy of $8,400. This translates to a lot of potential confusion.
Credit card debt is like revolving debt because the amount owed is meant to be paid off every month. That means any open balance will be charged interest and fees on a monthly basis, compounding over time. The longer an open balance is held, the more you will incur extra borrowing costs, including interest on top of interest from the previous month. This is why knowing your APR, and ensuring that you have the lowest rate possible, is so crucial.
The rate each person is offered depends on their credit score, the single unifying metric used to compare every consumer’s creditworthiness or the likelihood you will pay back your debts. Credit scores range from Poor to Excellent, depending on the length and amount of debt you have and any hiccups along the way. Those with Excellent credit can be approved for APR’s of 12-15% or less. That said, if you have minimal credit history or challenged credit, you could be looking at 25-29.99% APR.
Improving one’s credit score from Fair to Good, or Good to Excellent can seem difficult at times but there are a number of tools, tips and tricks for repairing your credit and ultimately being approved for lower APR’s. Most importantly, make sure you know the different rates you owe and that you are paying off debt with the highest interest and fees first!
The Silent Killer
While not quite as infamous as interest rates, fees and penalties deserve equal scrutiny.
They are easy to gloss over and can stack up if you’re not careful.
Some of the types of fees and penalties to look out for are:
- Overdraft fees
- Late payment
- Balance transfers
- Annual fee
- Foreign transaction
- Cash advance
You should also be mindful that some of these fees act as triggers. Once they kick in, your interest rate could increase.
Credit Limits–Not All You Can Eat
Now we’re getting to the good stuff.
Again, your credit limit is going to lean on your credit score. For the average consumer, it could be between a few hundred to tens of thousands of dollars every month.
Make sure that the credit limit you expect to receive is in line with your intended usage of the card.
Creditors get nervous when they see that you are close to maxing out your credit limit. It’s a good idea to keep usage under 10-15%.
Any higher could begin to negatively affect your score.
This is a big concern for those focused on building credit. Remember to treat your starter cards as a tool to climb your way up to the better ones.
We recommend not spending any money that you don’t already have in your checking account.
How to Maximize Your Incentives
Last but not least, let’s check out those cashback and rewards programs.
Now that we’ve got all the fundamentals out of the way, we can decide which kind of icing to add to the cake.
Some of the most common incentives are:
- 0% APR for 12 months on balance transfer
- 2-5% cash-back on all or limited purchases
- Various discounts with partner companies
- Loyalty points
- Airline miles
- And many more
If you’re a frequent flyer, you're going to want a solid travel card. If you like to eat out a lot, look for cards with ongoing discounts at your favorite restaurants. And so on.
You want programs that are relevant to your spending patterns and are easily redeemable.
The best place to start?