Picking The Right Credit Card Is Important — Here's How To Do It
Like it or not, credit cards, and the credit they build, are just as necessary as shower curtains and running water. Unless you plan on never owning a home or car, never borrowing money ever or paying an insane amount for various insurance policies, you'll need one.
So what to do? Finally respond to those thirsty banks who keep falling over themselves to offer you a line of credit? Just go through your regular old bank? Should you opt for airline miles or rewards? And what about bonus points, annual fees and cash-back?
With credit cards it's hard to choose AND easy to fudge it all up.
Luckily, plenty before you have wrung hands and spilled ink over The Right Credit card. One of those experts is Christine DiGangi, a reporter and editor for Credit.com. "Planning on carrying a balance? Look for a low interest rate," she says. "If you want rewards, decide what you want to prioritize, whether that's cash back, travel perks or something else."
Above all, she says, is that you should not just pick any card on a whim. "Read reviews, look at the disclosures, and make sure you know what you're getting into," she says.
Here's what she, and others, have to say.
DiGangi also stopped by to answer reader questions. You can read the questions and her answers here.
THIS WILL NOT IMPACT YOUR CREDIT
First, Check Your Credit Score
In order to find out what cards you can apply to, you'll need to see what shape your credit is in. "You want to apply for a card that matches your credit rating so you have the best chance of getting approved," says DiGangi. "Getting denied doesn't hurt your credit score, but each application dings it a bit. More applications result in more credit damage."
Gerri Detweiler of Credit.com says determining your own credit worthiness — or at least how lenders perceive it — will help you figure out what credit cards are available to you. You can get your report free of charge once a year from annualcreditreport.com.
Don'T PAY EXTRA TO BORROW MONEY
Find A Card With No Annual Fee
As NerdWallet's Kevin Yuann tells Forbes, for young people, cards with annual fees are not great first credit cards.
This is the card you'll hopefully be carrying for the rest of your life, says Yuann, since it's better for your credit score to have accounts for a long time. That means even if you upgrade down the road, don't cancel an existing card.
[Forbes]
OTHERWISE IT'S USELESS
Make Sure The Credit Card Actually Reports To Credit Agencies
One chief benefit of receiving a card is proving to the world that you can be responsible with credit. However, if your lender doesn't actually report your pristine credit behavior to a credit bureau, you won't get the benefit of a higher score. "Ensure that your card reports account activity to the three major credit bureaus — which it should if it's issued by a major bank and is a Visa, Mastercard, or American Express card — so that this first card can help build a credit history," says Ben Woolsey of CreditCardForum.com. You can confirm this with your lender before you sign up for the card.
[Money]
MIGHT AS WELL GET PAID TO USE IT
Unless You're Traveling A Ton, Just Get A Cash-Back Card
Remember, this is your first credit card, and you'll want to hold onto it, basically, until the end of time. Keep it simple. You use it reasonably, the credit card company gives you a small percentage of rewards points in return. Easy stuff.
And, as The Wall Street Journal's Scott McCartney reports, airline miles cards are quickly becoming less lucrative, even for Real Adults:
The new year is a good time to reconsider credit-card loyalty rewards and take advantage of sign-up bonuses. While airlines and hotels have diluted some of the benefits of their loyalty programs, the credit card world is still very competitive. If you spend $1,000 a month on credit cards, you can get back several hundred dollars a year.
Though DiGangi warns: "It may not be a good idea to apply for a rewards card if you're planning to finance purchases." Which, as a novice credit card user, you probably should not do. In the event you do, DiGangi recommends planning ahead. "If you're financing purchases, have a timeline for paying off the debt," she says. Here, a credit card payoff calculator is crucial.
TOTALLY OK IF YOU'RE A YOUNG PERSON
It's Not The End Of The World If You Have Poor Credit
If you have a low credit score, your only option might be a secured card, which requires a security deposit. But some cards are far better than others, and you need to be on alert for onerous fees.
The Capital One Secured MasterCard, which has a 22.9 percent variable APR for purchases, is a decent option for people who want to repair or build their credit history. It reports to all three major credit bureaus. It has a $29 annual fee. The card requires you to put up a minimum security deposit of $49, $99, or $200 depending on your credit worthiness, for an initial credit limit of $200.
almost never
How Do You Use This Thing?
Opinions will differ here, but largely you want to use your credit card as infrequently as possible. And never, never use your credit card to pay for something you otherwise couldn't pay for with your debit card.
Your main goal here is to demonstrate to the bank and other financial institutions that you can handle debt. DiGangi has a simple strategy for that: "Pick a small, monthly bill (for example, your Netflix or Hulu subscription) and use your credit card to pay it. Then set your credit card payment for automatic bill pay," she says. it's an easy way to use and build credit without doing much at all.
A good rule of thumb is to never carry a balance that's more than 10 percent of your credit limit.
Accrue a little bit on the card, then pay off the full balance every month1. Check your statement every month for monkey business, and don't skip a payment. Great job! Now you're building credit.
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