- Your credit history will play a role in what kinds of credit card you can get
- The best credit card for you will be based in part on how you plan to use the card
- Review the main features of each credit card: credit limits, interest rates, perks, and penalties
Credit cards can bring big advantages to your life. With a credit card, you can easily shop online or make convenient payments at stores and restaurants. So, understanding how to choose a credit card is essential.
Having a credit card also helps you build credit history, which can open important opportunities like buying a home or car.
Learning how to choose a credit card can be important to keeping your finances healthy. Keep in mind that misusing a credit card can have devastating effects. So, when you learn how to choose a credit card, it’s important to factor in how you are going to use the card.
You want a credit card that fits your needs, yet one that won’t get you into financial trouble with mounting debt.
How to Choose a Credit Card for the First Time?
When you choose your first credit card, you have several things to consider. You should consider your overall credit score and credit history and the way you will use the credit card.
Also look at a credit card’s four main characteristics: credit limit, interest rates, perks and penalties.
1. Credit History and Credit Score
You get approved or denied a credit card based in part on your credit score. With a higher credit score, you can generally get lower interest rates and better perks.
You can check your credit history for free in a couple ways:
- You can get on free credit report each year from each of the three major credit bureaus – Experian, Equifax and TransUnion. Request your free reports at AnnualCreditReport.com.
- Some credit cards, like Capital One and Discover, provide free FICO scores each month.
Your credit history plays a role in which type of credit card can best help your financial situation. With a lower credit score or tighter finances, you may have to find a card that has lower penalties so that you can try not to dig yourself into debt.
You may have to settle for a “secured” card, or one that requires a deposit so you can establish credit. These cards are designed for people with bad credit.
2. Using the Credit Card
Your spending habits can play a large role in which credit card to choose. You want to choose a credit card that will work to your advantage, such as by giving you the most rewards or lowest penalties. For example, if you are a frequent traveler, you may find a traveler’s reward card to give you the best returns.
If you plan to use your card often and you can pay off your balance each month – which financial advisors highly recommend – you should consider looking for a card with higher rewards.
If you have tight finances or if you may be forced to carry a balance from month to month, you should go for a card with lower interest rate. That way, your expenses will be smaller in the long run.
3. Credit Limit
It may seem like when it comes to how to choose a credit card, the higher the credit limit, the better.
Generally, that’s true. If you have a higher credit limit, you are less likely to max out your credit card. The proportion of debt to credit will be healthier with a higher credit card limit than a lower limit. That can improve your credit score.
On the other hand, if you have a tendency to spend frequently, you might want to choose a credit card with a lower limit to keep your spending in check. That way you can try to minimize your debt.
4. Interest Rates
For anyone learning how to choose a credit card, interest rates are a key factor to consider. That determines how much you will pay on your debt if you do not pay it off each month.
A low interest rate credit card can save you a substantial amount of money, especially if you carry debt.
If you are paying off your credit card each month and keeping zero balance, an interest rate is little less important of a factor. That’s because you will not be charge the interest rate, so it would not affect you.
High interest rates can really work against you if you don’t manage your credit card properly. If you plan to carry a balance, it’s important to consider how much you will be charged.
When you are accruing charges each month, that can add to your balance and result in mounting debt. You don’t want to get into this kind of debt cycle.
The credit card world is becoming increasingly competitive. To try to get your business, credit card companies are offering increasingly attractive rewards.
Think about your spending habits to choose a credit card that can give you the maximum benefits.
Again, if you are a frequent traveler, you can find rewards credit cards that offer cash back for traveling expenses like flights, hotels or rental cars. If you tend to stick with one brand, such as a particular airline or hotel chain, an airline credit card specifically for these brands may give you greater rewards.
Some credit cards offer specific rewards, while others, like Discover It, provide general rewards. Many cards reward you for spending, others offer a massive sign-on reward just for choosing the credit card.
No one learns how to choose a credit card with the expectation that they will incur fees or penalties, but it can happen.
Credit card companies have several ways of charging you. You can often get hit with a fee for any of these reasons: going over your limit, a balance transfer, cash advance, pay by phone or requesting a credit line extension.
Be sure to understand all the terms and conditions as you choose the credit card that’s right for you. Avoid credit cards with high fees, even if the rewards are strong.
How to Choose a Credit Card: The Bottom Line
Finding the right credit card for your financial life is important to get the maximum benefits with a minimum impact to your finances.
Give your own financial habits an honest review and strive to choose a credit card that maximizes gains (or minimizes losses) for your situation.