A credit card is a powerful and convenient financial tool. It gives you access to a secure way to make purchases with flexible repayment options. When leveraged smartly, a credit card can help you start to build or rebuild a positive credit history, giving you access to additional credit opportunities with better terms. Many cards provide valuable rewards like cash back or redeemable points. However, with so many credit cards to choose from, you may wonder how to pick the best one. Keep reading to learn about the different choices and how to determine which is ideal for your needs.
Know Your Credit Score
Check your credit score before comparing your options and submitting credit applications. Arming yourself with this knowledge will help you understand which cards you are likely to qualify for, narrowing down your choices.
A good credit score is necessary to qualify for the best interest rates and top rewards. A poor score can limit your choices or result in low credit limits and high interest rates and fees. If you have bad credit, you may want to spend some time bringing up your score before you apply for a credit card.
Remember that applying for any type of credit card will automatically trigger a hard inquiry on your credit report that will cause a drop in your score of up to 10 points. Plan accordingly and resist applying for too many cards at once, as a score drop caused by multiple new applications can lower your approval rate until your score recovers.
Take Stock of Your Spending Habits
A great way to get an idea of which type of card will work for you is by analyzing your previous spending habits to see where your money goes. Creating a budget and tracking your spending by category is an excellent tool for gaining important insights. Calculating how much you spend in interest will also help you decide if a low-interest credit card is a better option than a rewards card.
Compare Interest Rates and Card Usage Fees
Your credit card APR can vary widely, from 0% to 25% or more, although cards with a 0% APR typically only offer this as an introductory rate for a limited time. Interest rates heavily affect your choice of a credit card, especially if you often carry a balance on your card. Learn about any additional fees your card charges. Common fees are an annual fee, balance transfer fee, cash advance fee, foreign transaction fee, and late payment fee.
Understand the Differences Between the 4 Types of Credit Cards
Credit cards usually fall into specific goal-oriented categories. Understanding the differences will help you leverage your card to meet your goals.
Low-Interest Credit Cards
Low-interest cards are ideal for making a large purchase that you need to pay off over time. You can choose a card with a 0% introductory APR or a card with a low ongoing interest rate. Cards with 0% promotional APRs are best for purchases you can pay off before the promotional period ends.
Credit-Building Cards
If you have bad credit or no existing credit history, you may want to look into a credit-building card. These are usually easy to qualify for and help you build your credit quickly:
- Secured credit cards do require a deposit, which becomes your credit limit. These are low-risk for lenders and you should still qualify even if you have bad credit.
- Unsecured credit cards don’t require a deposit, so you need to qualify with your credit score.
- Student credit cards are designed specifically for college students with limited credit history. They generally have low initial credit limits and higher APRs, but may come with perks.
Choose a card that gives you access to limit increases with on-time payments or the option to upgrade.
Balance Transfer Credit Cards
Carrying long-term credit card debt is expensive. High interest rates and annual fees can cause your balance to balloon. If you have credit card debt, then a balance transfer card is a great choice. These cards have a low or 0% APR for a limited time, allowing you to transfer your balance from one or more high-interest cards. You can save a lot of money in interest while paying off your debt faster if you have a payment plan in place to eliminate your balance before the introductory APR runs out.
Rewards Credit Cards
Credit card rewards programs are becoming more popular as incentives to set a card apart from the competition. You typically need good or even excellent credit to qualify for the best rewards cards.
Credit card rewards include cash back, travel miles, or points that you can use towards other benefits. Consider your spending habits and which type of reward gives you the greatest benefits. If you travel a lot, then earned miles are a good choice. If you use your card for everyday purchases like gas and groceries, then a cash-back reward would be valuable.
Determine Which Benefits Are Most Important to You
With so many credit card options out there, it’s easy to get overwhelmed by choice. It’s important to take the time to compare the pros and cons to select the one best suited to your needs. Factor in your planned usage, interest rates, fees, and preferred rewards to find the credit card that will help you reach your financial goals.
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