If you’re looking to get a new credit card, whether it’s your first or your fourth, it’s important to give the decision some careful thought. Which card you pick and how you handle it is crucial. That’s because owning a credit card can make a significant impact on your overall financial picture. (Interesting fact: People with excellent FICO credit scores—ranging from 750 to 850—have three open accounts and six cards total, on average.)
Before you select a credit card, here are four questions you should ask yourself to be sure you’re making the right choice:
What’s my credit score?
Your credit score—a rating meant to help show lenders how trustworthy you’ve proven to be when it comes to repaying your debts—dictates what cards and loan terms for which you’re eligible. FICO scores, from the Fair Isaac Corporation, are the most commonly used credit scores and range from 300 to 850. Scores between 670 and 739 are considered good, about the average among U.S. consumers.
Here is how FICO breaks down credit scores:
|Very good||740 to 799|
|Good||670 to 739|
|Fair||580 to 669|
|Poor||579 and below|
The better your score, the better your options are for credit cards and other types of loans. That means you’ll qualify for lower interest rates and more generous rewards and perks. For example, with a fair credit score—ranging from 580 to 669 on the FICO scale—the average credit-card interest rate is 22.57 percent, according to WalletHub. But people with excellent credit scores get an average 14.41 percent rate.
Your bank or credit-card company (if you already have a card) may provide your score for free. Other financial sites—including Credit Karma, Credit Sesame, Credit.com and Bankrate—also allow you to view your score for free. Note which type of score you’re seeing: Some offer the most widely used FICO scores while others show you alternative scores, such as your VantageScore, a relatively new rating developed by the three major credit bureaus (Equifax, Experian, and TransUnion) that’s gaining in popularity. They’re all legit, but they can differ. So your potential lenders might be seeing a different score than you’re expecting.
How’s my budget and where do I spend my money?
It’s easy to think of a credit card as a sort of extension of income, giving you the latitude to spend more each month. But you don’t want to fall into that trap. Ideally, you’ll be able to pay off your entire credit card balance every month. And the state of your current budget can help you predict how easy doing so will be for you.
Also, examining your spending habits can show you what types of credit-card rewards would be most beneficial for you. For example, if you do most of your shopping at a particular store, you may want to take advantage of any savings offered by that retailer’s credit card. Or if you do a lot of traveling for work or play, a travel rewards card may be your ticket to better perks. Just be aware that annual credit card fees can rack up, so be mindful of that when making your card choices.
Why do I want a new credit card?
Not to push you too deep into existential thought or anything, but thinking about your purpose for a new card is key to picking the right one for you.
If you want to build up your credit history…
A student credit card or a secured card might be your best bet. Student cards are pretty much just like any other credit card, but obviously targeted to students, whom card issuers assume are noobs to credit. They typically come with lower approval standards, lower limits, and higher rates. Secured cards are similar, but you don’t have to be a student to get one, and you have to put down a deposit (usually $200 or more) to get started.
If you want a new card to help make ends meet or pay down existing debt…
Or if you know you’re just prone to overspending or forgetting payments—you need to focus on getting a card with a low interest rate. That’s because you’re likely going to carry a balance for at least a little while. And you want to make sure that debt doesn’t grow too fast due to a high rate.
For example, let’s say you have a balance of $6,929 (the average for American households in 2018, according to Bankrate), and you only repay the $207.87 minimum required each month (3 percent of $6,929). If your rate is a low 5.9 percent, it’ll take you 10 years to pay off the whole balance, including $1,273.83 in interest. If your rate is a whopping 24.9 percent, your repayment timeline more than doubles, and your total interest skyrockets to $14,273.21.
You might even be able to qualify for a zero-rate card. Balance-transfer cards, in particular, often come with this introductory offer, making them a great deal when you’re getting serious about paying down your existing credit-card debt. Keep an eye on the calendar, though. Once the intro period ends, your rate is likely to skyrocket. Of course, no matter how low your rate, remember: The sooner you pay off your credit-card balance, the better.
If you want to get something in return for your spending…
A rewards credit card is the way to go. Whether it’s for a retailer, getting cash back or travel, these types of cards usually offer sweet sign-up bonuses, as well as ongoing perks. But they also often have high rates, so you want to be sure you can pay off your balance every month. Retail cards tend to be easier to qualify for, but the best cash-back and travel rewards cards may require high credit scores to qualify.
What are the terms?
Once you’ve narrowed your choices, start digging into the fine print. Make sure you understand the following terms and know the specifics for each card you’re considering:
The annual percentage rate is what the credit-card issuer (or any lender) charges for your debt. The average APR on all existing accounts is 14.14 percent, according to WalletHub, but for all new offers, the average is 19.24 percent. And not only can the APR vary greatly between cards, it’s also a variable rate for each card. That means that when the Federal Reserve makes headlines for cutting or raising rates, the APR on your card is very likely to change accordingly.
Your credit-card issuer may hit you with other charges on top of your accrued interest. Some fees to watch out for include annual fees, balance transfer fees, foreign transaction fees, cash advance fees, just to name a few. You may also get charged for going over your spending limit or making late payments.
This is the lowest amount you’ll be required to pay each month, usually stated as either a flat rate (often $25) or a percentage of your balance.
Bonuses and rewards
You want to understand the nitty gritty of all this good stuff to make sure you get the most out of your card. Sign-up bonuses can be especially tricky. For example, a card might seem to offer a seemingly great deal of, say, a $250 cash bonus for opening an account, but it might require you to spend $5,000 in the first 30 days of getting your card. That could make sense if you can pay off that balance immediately. Otherwise, you may wind up paying more interest than you got out of the so-called bonus.
These are not likely to be deal breakers, but if you can get some extras out of your card, why not use them? For example, many credit cards come with rental car insurance. You might even be able to get roadside assistance or early access to tickets for shows and other events.
Making the final decision
Whatever card you find works best for you, make sure you handle it responsibly. Credit cards, in general, can be great financial tools that help you build your credit score, earn rewards and even prop you up in times of need. But they can also wind up being huge liabilities if you lose control of your spending with them.
First and foremost, you want to pay at least the minimum required each month on time. But you really should aim to pay off your balance in full and every month. Also, try to minimize your credit-card usage, staying well below your limits.
Doing these things help boost and maintain a solid credit score. That way your credit-card usage won’t derail you from achieving all your financial goals.