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How to Choose a Credit Card
When you start shopping for a credit card, you may be thrilled with all the options available. There are credit cards that:
- Provide cash back
- Offer rewards like points toward airline tickets and hotel stays
- Make it easy to do a balance transfer
- Build your credit
- Allow higher credit limits
And some cards can provide a combination of those things.
Used wisely, credit cards can be a great help to your financial planning. In this article, we'll explain how to choose a credit card that will be the right fit for your lifestyle as well as your financial goals.
Understand your credit report
Applying for a card doesn't mean you'll be approved. Credit card issuers will first look at your credit report and decide whether you will be a responsible cardholder. So, this should be your first step, too.
A credit report is a summary of your personal credit history. Your credit report includes identifying information—like your addresses (past and present) and date of birth—and information about your credit history, like whether you have paid your bills on time or filed for bankruptcy.
Where does a credit report come from?
Three nationwide credit bureaus—Equifax, Experian, and TransUnion—collect and update this information. Not all creditors report information to credit bureaus, but a credit report will likely include most credit card accounts, mortgages and other loans. Not all three bureaus receive the same information, so their reports on an individual may differ.
It's important to look at each bureau's credit report at least once a year to make sure it's accurate and spot potential identity fraud (like a credit card in your name that you didn't open). Under a federal law known as the Fair Credit Reporting Act, the bureaus must:
- Make sure that the information they collect about you is accurate
- Give you a free copy of your report once every 12 months
- Give you a chance to correct any mistakes
Credit score
Based on the information in your credit report, the credit bureaus assign you a credit score. The most common one is the FICO score, with a range of 300 (poor) to 850 (exceptional). However, each bureau calculates different types of credit scores for lenders, so you don't have just one credit score.
The credit score tells a potential lender or credit card issuer how good (or bad) a risk you are. Your credit report and credit score impact whether you can obtain credit, how much you can borrow, and what the interest rate will be.
Factors that are typically considered by credit scoring models include:
- Your bill-paying history
- Your current unpaid debt
- The number and type of loan accounts you have
- How long you have had your loan accounts
- How much available credit you’re using (credit utilization)
- New applications for credit
- Whether you have had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago
A good credit score will likely qualify you for many cards, including rewards credit cards and cashback cards, and cards with lower annual percentage rates (APRs). However, there are plenty of cards you can get with a lower score, and some will even help you improve your credit score.
Know your spending habits
Knowing how you will use a credit card will help you decide which card works best for you. For example, if you plan to make a major purchase, you may look for a card with an introductory offer of 0% interest for the first six to 12 months. If you will use it regularly for everyday expenses, like gas and groceries, consider cards that reward you for those purchases.
What do you spend the most money on each month?
Create a list or a spreadsheet of a month's worth of expenses and your income to gain an understanding of your cash flow. Then look at which of those expenses could go on a credit card, and how quickly you could pay them off with the money you have coming in. (Remember: If you carry a balance on a credit card, the interest it accrues every month makes it increasingly difficult to pay off.)
Aside from rent or mortgage payments and car loans, it's likely that the lion's share of your spending will be in five regular categories: groceries, dining, gas, travel and entertainment. Once you analyze those areas and understand where the lion's share of your spending is, you will have a better understanding of the types of credit cards and credit card benefits that will be most valuable.
Research credit card options
Using the information you've gathered, decide what you want a credit card to do for you and start researching.
Learn more about types of credit cards
There are many different rewards programs and interest rates, so options vary widely.
- Cashback cards. Some cards will return to you a percentage of your spending. These rewards appear on your monthly statement, and can be applied against the balance, deposited in a bank account, or used for gift cards and other purchases. Some cash back offers might change quarterly and others maintain a steady percentage for certain types of purchases
- Travel credit cards. Some cardholders like to accumulate points or miles that they can use to buy plane tickets, book hotel rooms, and rent cars. These cards may offer 3x, 4x, or 5x points on particular purchases
- No annual fee cards. Credit cards that don't charge annual fees are plentiful, and many come with cashback options
- Low-interest or 0% APR introductory offer cards. If you have credit card debt or plan to make a big purchase, cards that offer a year or more of 0% APR or a very low interest rate can help with debt management
- Credit building cards. Many card issuers offer secured and unsecured credit cards that help you build credit history and improve your credit score. These are particularly useful for students and young people just starting out
Narrow down credit cards based on rewards offered in a category that is important to you
Choosing a credit card really comes down to what's important to you. Once you determine where and how you spend—and how you will pay off credit card balances—it becomes easier to sift through the options.
For example, if cash back is important, focus on those cards and look for the best offers, which often have no annual fees. If you're saving up points for vacations, look for a travel card with generous bonuses, companion passes, annual travel credits, and other perks.
Know the credit card basics
Before obtaining a credit card, brush up on your basic credit card literacy. It will help you to choose and use a credit card to your best advantage.
- APR. For credit cards, the APR (annual percentage rate) is similar to the interest rate. APRs can vary based on the type of transaction (purchases, cash advances) and may change over time based on market conditions or your creditworthiness
- Minimum monthly payment. The minimum payment is the smallest amount you are required to pay each month to keep the account in good standing. It is usually calculated as a percentage of your total balance, typically around 1% to 3%. Paying this minimum amount by the payment due date prevents late fees, penalty APRs, and the damage to one's credit score that can result from too many late or missed payments. However, making only the minimum payment can lead to substantial interest charges over time. Federal law requires that monthly statements include a “Minimum Payment Warning.” It shows how long it will take to pay off the current balance with minimum monthly payments and how much interest you'll pay
- Annual fee. Premium and travel rewards cards typically come with annual fees. They may provide access to additional perks, such as free checked bags and upgrades, but if you're not likely to use those benefits, annual fees may not be worth it
- Rewards. What is the credit card issuer or bank giving you in exchange for your business? Rewards can come in the form of cash back, points/miles, discounts and other perks
- Bonuses. In order to attract your attention, a credit card may offer a bonus in the form of cash or points. There may also be annual bonuses for existing cardholders