Summary: A credit card is a secure and convenient method of payment that can also offer benefits and rewards. There are a few factors you should consider to decide how to choose a credit card. These include APRs, qualifications, and benefits. Ultimately, choosing a credit card comes down to what works best for your particular situation.
Credit cards are everywhere. You see them at the cash register. You see them as the default payment method for online stores. You even see them in ads and commercials. Everyone you know seems to have one (statistically, 75% of people do). Credit cards are now the standard form of payment.
What’s with all the hubbub?
There’s a few reasons why most people have one. It’s convenient. It gives you cash back. You can get travel points. And to some people, it’s like it’s free money (shame on you if you do that last one).
Maybe some of those reasons appeal to you and now you want to apply for a new card. Before you do, there’s a few things you should know before you submit your application. This post explains everything you need to know before choosing your next credit card.
Understand Basic Credit Card Terms
It’s important to understand the basic credit card terms you’ll come across during your search. Knowing common terms enables you to compare offers from multiple card issuers and choose the one you like best.
- Balance: A credit card balance is the total amount of money you owe to your credit card company. When you use your card to make a purchase, it increases. When you make a payment, it decreases.
- Carry a balance: If you don’t pay your credit card bill on time and in full each month, whatever’s left – the unpaid balance – gets carried over to the next billing cycle. If you carry a balance, you’ll most likely be charged interest on the portion of the balance you didn’t pay. Carrying a balance can hurt your credit score if it accumulates.
- APR (annual percentage rate): This is the interest you need to pay if you carry a balance. It’s basically a fee that’s a percentage of how much you owe on the card. With most credit cards, you won’t owe any interest if you pay your full statement balance by the due date. In theory, you should never have to pay attention to this if you always pay in full on time. But of course, lower is always better.
- Minimum payment: The lowest amount of money you can pay each month. If you don’t pay the minimum payment, you may incur late fees and could damage your credit rating. If you want to avoid paying interest, you should pay the full statement balance on your card, not just the minimum.
- Fees: Some common fees include annual fees, late payment fees, balance transfer fees, foreign transaction fee, etc.
Decide What Type of Credit Card to Get
The first step to choosing a credit card is to figure out the type of credit card you want based on your needs.
There are many different types of credit cards available for you to choose from. Here’s a few common ones you might run into (ordered by most to least desirable):
Rewards/Cashback credit cards
These are the types of credit cards you hope to qualify for (assuming you have all debt paid off).
Rewards credit cards give you points, miles or cash back on every dollar you spend.
Of the other credit card types in this list, these will give you the most rewards/cashback per dollar spent.
It’s not uncommon to see cashback rates of 5% or more for these types of cards. Side note: every mile is roughly equal to one cent.
Student credit cards
Student credit cards are designed specifically for college students with little or no credit history.
These are easier to get approved than other credit cards and are a good way to build credit as a youngster new to credit cards. Most of them are tailored for the spending habits of a student.
Some of them might even give you cash back bonuses for good grades.
Balance transfer card
These credit cards are designed to consolidate card debt debt. This will help you pay off debt faster by moving from a higher interest rate to a lower interest rate.
Many balance transfer cards come with a 0% APR introductory rate for a year or longer. By transferring your credit card debt to one of these balance transfer cards, you can save thousands of dollars on interest.
Secured credit cards
If you have a bad credit history and want to rebuild it, you can look into secured credit cards.
Secured credit cards are basically credit cards that require a security deposit upfront in exchange for being more easy to qualify for. The security deposit will be returned to you when the account is upgraded or closed in good standing.
Obviously this isn’t a preferable situation. But if it’s the only choice you have with your poor credit score, it might be the way to go.
That pretty much covers all the main credit cards you’ll be looking at. There are many other types as well. So if you want to go deeper down the rabbit hole, you can check out creditcards.com’s article.
Decide if you’ll carry a balance
If you plan to carry a balance, even just sometimes, you should prioritize a low interest rate over sign-up bonuses and rewards programs.
At best, the lowest credit card APRs you can get are around 15%. On the other hand, the best cashback/rewards rates you can get are around 1% to 2%.
If you spend $1,000 with your credit card in a year, you could get between $10-20 at those rates. However, if you forget to pay it or can’t pay your balance for just one month out of the year with a $100 balance, that’s instantly a $15 extra fee you have to pay. Usually it’s more, especially if you add on any fees for not paying the minimum balance.
Usually, rewards cards have a higher APR while cards with low APR don’t offer much rewards. So you need to choose between rewards and APR, not both. However, you could choose to have multiple credit cards to serve your different needs.
If you never carry a balance, then you can essentially ignore the interest rates when shopping for a credit card and just focus on the rewards/cashback rates.
On the other hand, if your financial situation changes in the future and you’ll need to carry a balance, you’ll probably want to get another new credit card just for that purpose.
If you’re planning to make any big purchases, you can look for credit cards with a 0% promotional APR. There are several cards out there that will not charge you any interest or a year to a year-and-a-half when you first sign up. If you think you can repay what you borrow before the promotional rate expires, you won’t have to pay any interest.
Look at your spending habits
Many credit cards give you bonus rewards points for certain kinds of purchases. Those spending categories might include travel purchases such as hotels or airline tickets, gas, groceries, restaurants, or business spending.
Some cards rotate their promotional categories, which means at different times of the year you may get extra rewards for different kinds of purchases. Others keep their program the same year round, so you’ll always get the same points/cashback for whatever the card promotes.
When you choose a credit card that offers higher rewards for purchases you make frequently, you can earn more points, miles, or cash back. So you should look at where you spend your money, and try to find a card that matches your spending.
Alternatively, you could get several different cards or different spending habits that you have.
Besides matching your spending, you should also make sure that your card offers rewards you’ll actually use. It doesn’t do much good to earn a bunch of free airline miles if you rarely travel. If you’re unsure, you can just go with cash back rewards for the most flexibility.
Review the qualifications
Finding a card you love doesn’t do much good if you can’t qualify for it. Most creditors don’t specifically state their minimum qualifying requirements. However, there are some basic requirements card issuers typically expect:
- High credit score: Card issuers don’t typically list this as one of their requirements, but they will reject you if your credit score is too low.
- Age: To apply for one, you need to be at least 21 years old. If you’re between 18-20, You can apply for one with your parent’s permission or a proof of income.
- Social security number: you need one to establish a credit history.
- Source of income: Credit card applications usually ask for your estimated monthly income. Most of the time, this is done on the honor system (just type in a number on a form). But in some cases, they might ask for your W-2.
Check your credit
When you apply for a credit card, the condition of your credit will have a huge influence over whether you get approved or not.
If you have opened a credit account, you have a credit report. Credit reports list your bill payment history, loans, current debt, and other financial information.
You can check your credit score for free from some online sources, but they could be different from what the lender sees because there are different scoring systems. You can check your credit report for free once a year at AnnualCreditReport.com.
Companies and lenders use your credit report information to calculate your credit score, which is a number between 300 and 850. Although ranges vary depending on the credit scoring model, here’s roughly how credit scores rank:
- 750+: excellent
- 700-749: good
- 600-699: fair
- 300-599: poor
The better your score, the greater your chance of being approved for cards with better perks. Many credit cards require good to excellent credit to qualify. So before you apply for a credit card, you should check your credit score to get a feel for your chances of getting approved.
If your number is not what you expected, go through your report to see what’s causing the problem. Then you can look into ways to improve it (dispute an error, change spending habits, etc) before you apply.
Don’t Apply for Cards Recklessly with a bad credit score
Getting an idea of your credit score is helpful, because, for example, if your credit score currently falls in the “fair” range, it’s probably not wise to apply for a premium rewards card that requires excellent or good credit to qualify.
Applying for a card involves a hard inquiry on your credit report. This leaves a small dent on your credit score. I guess if you’re requesting a lot of hard inquiries it tells creditors you might be more desperate for loans and desperate people = people who don’t pay back loans.
This is why you should be selective about what cards you apply to. You don’t want to take hits to your credit score if you’re just going to get rejected.
Review the key terms and fees
There are many different credit cards within each category. So you’ll want to compare your options carefully. Here are some key points to look out for:
- APR
- annual fees
- minimum payment
- Rewards
- sign-up bonuses
- other perks
- late fees or penalty APR for missed payments
- balance transfer fees (if you plan to transfer a balance)
If there’s an annual fee, you may need to do some math to see if it’s worth paying the fee in exchange for a lower interest rate or more generous rewards. For example, if one card has a $100 annual fee but you get 2% cash back and the other card charges no annual fee but you get 1% cash back, you’re better off paying the fee if you spend more than $10,000 per year.
If you plan to use your card while traveling abroad, find out if you must pay a foreign transaction fee.
If it’s a student or secured credit card, you should prioritize cards that build credit and/or have the option to upgrade to a better card later on. Some secured credit cards, for example, don’t report your credit card payments to the three major credit bureaus and will not impact your credit score. If you want to build your credit score, you should find one that does.
As with most other products, you may also want to find out if other customers have had a good experience with the card issuer. You can read reviews or check the consumer complaint database maintained by the Consumer Financial Protection Bureau (CFPB).
Conclusion: How to Choose a credit card
Ultimately, choosing a credit card comes down to making a decision based on your personal needs. Evaluate what you can qualify for, then choose one that works the best for your particular financial situation.
Once you have your card, make sure to use your card appropriately to get the most of your money. If you’re trying to establish credit, pay your bill in full every month and don’t use too much of your available credit. If you’re trying to rack up rewards, use your card for everyday purchases and pay your bill in full every month.
Don’t assume you need to use the same one forever. If your spending needs change, you may want to go through these steps again to get a new card that aligns with your needs.
My Recommendation
If you want my recommendation, I would go for the DiscoverIt credit card (I use this one personally). I prefer to get cashback rather than points because cash is always more flexible than getting store points or miles.
You get 5% cash back on a rotating set of categories like grocery stores, gas stations, and rideshare services. You also get 1% back on everything else. Their APR ranges between 11.99%-22.99% depending on your credit worthiness.
They have a promotional rate of 0% APR and 100% cashback matching for your first year. This means in total, you’ll be getting 10% cashback on certain things and 2% back on all others.
Apply for a card using my link and you’ll also get a free $50 signup bonus.
Fun facts: used to lion dance in college, can speak 3 languages (sort of), can lift 400 lbs, once ate a chicken head.
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