Credit cards can be great tools to help our everyday finances. The average Michigander has about $6,000 in credit card debt, so you certainly want to be diligent about paying your balance away in full each month to avoid very high interest charges. You also want to avoid fees whenever possible.
Ok, we had to put that PSA out there first. Now onto business. What is the best way to select a credit card? The stock answer from a financial advisor – it depends. There are several factors at play. Let’s explore some questions that need to be addressed to get you that ideal card.
What is your credit score & history? FICO provides a credit rating service for credit card companies on each borrower. Scores range from below 500 (bad) to 850 (excellent). The score is based on several criteria – payment history, amount owed, length of credit history, types of credit and recently opened lines of credit. We detail the factors in another article within the TFC library.
Nowadays, you can get your score from an existing credit card you may have since many credit card issuers offer free credit reports and score-viewing options. You can also check it out the popular site CreditKarma.com. But there are also free online calculators available that will give you a good-enough ballpark idea of where you stand with your score.
Once you know your score, ask yourself what is the purpose for the card? Is it for emergency use only? Do you want to use it for travel? Are you looking to score a big sign-up bonus offer? Is it for gas & groceries? There is a card for every purpose to suit the fancy of American consumers. So it is worth it to find the right type of card for your goals. As a reminder though, you often only get to reap the benefits of points & cash back offers if you pay your card off in full each month.
What benefits do you want the card to come with? Do you want it to have travel insurance? Are you simply looking to build your credit history? Is identity protection important to you? Are you going to use it for international travel? There are many hidden benefits from being a card-holder that most folks are not aware of.
When should you NOT apply for a credit card? Know thyself. If you struggle with over-spending, first – you are not alone. The typical American spends just about the same as what they earn, so most of us are prone to spending a little too much.
But another thing to consider is if you are planning to buy a house or apply for a hefty auto loan in the near future. When you apply for a credit card, your score gets dinged a little bit. Lenders see applying for a credit has a potential red flag that you are short on funds. If you are starting the process of buying a house then you want to be sure your credit is in tip-top shape, so it’s not the best time to get a new credit card since it can cost you in the form of a slightly higher mortgage rate.
So where should you go to find the right card for you? The aforementioned CreditKarma.com has emerged as a go-to site when it comes to credit analysis & recommendations. Another site is, not surprisingly, CreditCards.com where you can input your information & goals, and it will produce a list of ideal cards for which to apply. One more website is NerdWallet.com – an all-encompassing personal finance forum that has a dedicated set of pages for finding the best credit card.
These sites will step your through questionnaires about your credit history and ask you about what you want your credit card benefits to be. At the end, the sites will recommend a list of cards – just watch out for all of the ads that may comes with these sites. You almost certainly want to find a card with no annual fee unless you are a real pro with credit card rewards.
Sometimes simplicity wins out. While we don’t have a specific credit card to recommend, it may be best to just find a card with no annual fee and one that provides a simple ‘cash back’ feature – 1% or 2%. Credit card rewards can quickly get complicated and become more trouble than they are worth.
A couple other tips about credit cards – it can be ideal to have two cards just in case one is not accepted at some locations or if you lose one or it gets stolen. Also, if your credit card company cancels your card for whatever reason, you have a backup. Another point – be wary of canceling an old card since that could actually hurt your credit score. It may seem counterintuitive but keeping a credit card active builds your credit history and keeps your available credit higher – two key metrics that determine your score.
Here’s the point
- Know yourself. Use cash as opposed to plastic if you struggle with over-spending.
- Research your credit score using online tools and from sites that offer a free score estimate.
- Use the well-known credit card research sites to help you find the right card for you – find a few choices that do not come with an annual fee and have a straight-forward rewards program.
Action items
- Use the credit card finding process as an opportunity to dig into your credit report and history as that is a key piece of your personal financial situation.
- Sit down with us at TFC to assess where you stand when it comes to your financial goals – where does a credit fit in with your plan?
- Be responsible with credit but also take advantage of the great offers that are out there.
Featured Image: Photo by rawpixel.com