Pick the Type of Credit Card You Need
When choosing the right credit card, you should first start
to think about your financial goals. For a lot of people, a credit card helps
you purchase large ticket items before you have the cash available in your bank
account. Other people may want to build their credit score in order to qualify
for more sophisticated types of financing in the future.
Here are three common scenarios for picking a credit card
based on specific financial goals.
Cards for No Credit History
If you have no credit history at all, or even if you have bad
credit, there are a couple of options for you that can help you create a better
financial foundation. If you’re in college with not much of a financial
background, try a student credit card. You’ll likely have a low limit, but it’s
a great way to start earning more trust from creditors.
Secured credit cards can help if you have a negative credit
history. You’ll need some type of collateral, usually cash in a savings
account, but your on-time payments will be reported to one or more credit
bureaus. Interest rates might be higher, so try to pay off your balance each
month. Since you probably already have the cash in an account, a secured credit
card is more about rebuilding that history rather than borrowing money.
Balance Transfer Cards
A balance transfer card is an effective way to consolidate
one or more credit cards taking advantage of a lower APR. Many credit card
companies offer an introductory period where you can pay either low interest
rate or even a 0% APR for a set period of time.
If you have a solid plan for paying off that debt within
that timeframe, you could save a lot of money compared to the older card’s
rate. There are, however, a few details to be aware of before choosing a
balance transfer card.
First, check to see if there’s a balance transfer fee.
Oftentimes, this is charged as a percentage of the debt you’re transferring
from other cards. For example, if there’s a 2% transfer fee and you’re bringing
over $10,000 in debt, you’ll have to pay $200. Run the numbers to make sure
you’re not paying more than you’re likely to save.
Secondly, find out what happens after the introductory
period is over. Credit card companies sometimes impose penalties if you have a
balance after that beginning period. Also, if you miss a payment at any time,
you may be retroactively charged interest at the higher rate.
Rewards Program Cards
If you have relatively strong credit, you could qualify for
a credit card with a rewards program. These come in different categories; for
instance, you can find cash back rewards, travel rewards, or retail-specific
rewards programs.
Before you apply, find out how points are accumulated and if
there’s any distribution amount minimum. Usually, you need to actually pay your
balance off before earning points. Different programs also vary in whether one
dollar equals one point. For cash back programs, you’ll definitely want to
check the conversion ratio to get an idea of how much you’ll earn.
You may also have to wait until you earn a certain amount of
points before you can exchange them for your rewards. Finally, some credit card
companies require you to cash in your points on their own shopping or travel
platform. At the very least, you’ll get a better conversion ratio when you do.
How to Compare Credit Cards
Once you’ve narrowed down the type of credit card you want, you
can then compare your offers based on a few different features.
- APR: The annual percentage rate tells you how much interest you’ll
be charged over the course of a year.
- Annual fee: Think twice if you have to pay an annual fee on your
card. An exception is a rewards card that earns you more than you spend on the
fee each year.
- Purchase protections: Many credit cards offer perks like retail
purchase protection (if something is damaged or goes on sale with a certain
timeframe)
- Travel protections: You may also get trip cancellation protections,
lost baggage protection, and rental car insurance. For frequent travels, these
benefits offer a lot of value.
- Miscellaneous fees: Check your card’s policy on things like late
payment fees, foreign transaction fees, and cash advance fees.
After you’ve collected these details, prioritize what’s most
important to you. APR definitely matters if you intend to carry a balance.
If you don’t travel a lot, you probably shouldn’t care about
travel protection benefits. If, on the other hand, you’re more concerned about
late payments or other potential fees, compare your card offers based on those
factors.
Understand Impact of Credit
Throughout the credit card selection process, remember that
your credit score is the primary determining criteria in whether or not your
application is approved and what kind of APR you can expect. Not all credit cards
are created equally, so even though you get denied for one doesn’t mean you’ll
get denied for every single one.
If your application does get turned down, request a copy of
your credit score from the credit card company. By law, they’re required to
give you a copy as well as a reason why you were denied.
Don’t be shy when it comes to finding out why your credit card application was turned down. Instead, figure out the problem so you can come up with a solution.
If you want to focus on qualifying for a specific type of
card that requires a better credit score, you’ll know exactly what steps to
take. Whether it’s paying off existing debt or establishing a better repayment
history, you can start taking action to reach that goal.
In the meantime, you can consider applying for a different
card that fits your actual credit profile since you’ll know exactly what the
creditor sees when you apply.
Frequently Asked Questions
How is interest charged on a credit card?
When you don’t pay your balance in full by the due date, you’ll start to be charged interest on the remaining balance. The way it’s calculated depends on your card agreement, so read that carefully to know what to expect. In most cases, credit card companies charge interest daily, so you’re constantly being charged more when you have an outstanding balance.
Do credit cards affect your credit score?
Yes, credit cards impact your credit score in several ways. When you make your payments on time each month, you’ll contribute to a stronger credit score. But if you have frequent late payments, your score will drop. Similarly, too much credit card debt can also hurt your score, especially if your cards are maxed out or close to it.
Can applying for multiple cards hurt your score?
Every time you apply for a credit card, a separate inquiry is listed on your credit report. Each one drops your credit score by about 5 to 10 points for a full year. After that, that score impact goes away, but the inquiry itself is still listed for another year.
Should you pay your credit card in full?
Paying off your balance in full each month saves you money because you won’t accrue any interest on your account. If you participate in a rewards program, you can accumulate points without being charged interest, making it a win-win if you’re simply charging things you’d pay cash for in the first place.
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by Lauren Ward
Personal Finance Writer
Lauren Ward is a personal finance writer with nearly ten years of experience covering topics like loans, credit, and real estate. She lives in Virginia with her husband and three children.
