When used properly, a credit card is a valuable tool for building or improving credit. Making your payments on time and maintaining a healthy utilization ratio (how much you owe compared to your overall credit line) is the best way to utilize a credit card. Choosing an appropriate credit card, however, can be tricky, given the sheer number of options out there. Here are a few tips on what to do and what not to do when looking for the right credit card.
- think about your spending habits
- consider your credit card limit
- your research
- shop around
- make a hasty decision
- apply to several cards at a time
- close your other accounts
- plan to put all old debt on your new card
- neglect to plan for payments
The way you plan to use your credit card may determine what features you will want. If you habitually pay your entire balance on time each month, you may not need to worry so much about interest rates. If you typically carry a balance throughout the year, interest rates will be more important. If you use your credit card for most purchases, cash back rewards will be more beneficial to you than they would be for those who only use their credit cards for emergencies. Do you travel frequently? Some cards offer airline points and rewards that can help save on flights.
How much of a balance do you foresee? The best practice is usually to maintain no more than 30% of your credit card’s limit as a balance. Keep that in mind when thinking about what sort of credit limit you will need for your card. Of course, this isn’t all up to you, and depends on the amount of credit your card provider is willing to extend.
Now that you have a few ideas for the features on your card, you can do some research. Look into several companies — from the big cards to some lesser-known ones — to identify offers that might be right for you.
Now that you’ve done your homework, you should pick 2 or 3 credit cards that interest you most. You can call these companies to see what rates, credit card limits, and rewards they have available based on your personal information. Now is not the time to be shy — be sure to negotiate. If you have a great credit score, bring that up. If a competitor sent you a great offer in the mail, bring that up — whatever you can do to get the best offer available.
A credit card is a major decision — do some comparative shopping. Credit cards are inextricably tied to a your financial wellness, which is a very important aspect of your life. If everything goes well, you’ll have and use this card for years to come. You wouldn’t pick your primary care doctor or a car without doing your research — so use the same due diligence when picking the right credit card.
You likely have received credit card offers in the mail, promising low interest rates and great benefits. Don’t just apply for the first offer you get in the mail. Fact is, you can still get rejected from some of these “pre-approved” cards. You should keep a few offers around for negotiation purposes, and to see if the offer is one you’re interested in — but you will want to do a little digging before you pick the right credit card company.
Never have multiple credit card applications in the works at the same time. Too many inquiries into your credit will be listed within your credit reports and can ding your credit score significantly. The reason is simple: Multiple inquiries in a short time span can indicate a desperate need for credit, making you look like a poor credit risk.
Just because you have a new credit card on the way does not mean you should close your other credit cards or accounts—even if you don’t plan to use them. Credit scoring formulas consider, among other things, debt-to-credit utilization. Closing old accounts, in essence, cuts the amount of credit you have available, and so any balances you carry will take up a much larger chunk of your available credit. This can make you appear to be overly dependent upon borrowed money, lowering your credit scores, so don’t close old accounts unless it’s imperative.
It’s not necessarily a good practice to transfer all your old debt to your new card. If you end up going well above a healthy credit utilization rate, you can end up damaging your credit. Try to pay off your old balances first, and depending on the balance, transfer one or two over if you need to.
This may seem obvious, but it can be difficult to remember to make a brand new payment, especially when you have other monthly payments to keep track of. Many credit card companies offer automatic debit on a monthly basis, so that your minimum payment is deducted directly from your bank account. Or, if you keep a spreadsheet or other document to track your monthly bills, don’t neglect to add your new credit card to that plan. When applying for a new credit card, make sure to plan on how to add that payment to your ongoing bill payment schedule.
With so many options available, picking a new credit card can seem to be an arduous task. Use these tips to help find the right option for you, and get your new credit card account off to the right start.