Credit card debt is booming in the United States as consumers struggle to cope with inflation and rising interest rates. Owning a credit card can be financially risky, but if you choose a credit card wisely, you can get benefits you can’t get without a card.
No card is right for everyone, and there probably isn’t even a best card for you. The key is to start by understanding where you are now; what is your credit profile and what is your main objective when you have a card? Do you need to improve your credit? Are you planning a large purchase or hoping to transfer the balance from another credit card with high interest rates? Or do you have your eye on cash, travel, or other rewards? A little soul searching before your credit card search pays off in the long run.
Here are the questions you should ask yourself before applying for a credit card.
What is my credit score?
If your FICO score is above 670, you are considered a “good” or better credit risk. Good credit can qualify you for cards with lower interest rates, rewards, or other perks. If your FICO score is below 670, you have “fair” or even “bad” credit and should apply for cards that can improve your credit score.
A FICO Score, often referred to as a credit score, measures your creditworthiness on a scale of 300 to 850, where a higher score is preferable. Major banks, credit unions, and credit card companies often provide a free FICO score to their customers. If you can’t find a FICO score, you can access it for free at the credit bureau Experian (opens in a new tab). Checking your FICO score will not lower your credit score.
Why do I want a credit card?
If you have good credit or better, you may qualify for a variety of rewards credit cards that can help lessen the impact of inflation on your purchasing power. These rewards cards may have some (or more) of the following characteristics.
- A fixed amount of cash back on all purchases (several issuers offer around 2%).
- Cash back for purchases in specific categories, like 5% back on groceries.
- Points or miles for travel, such as flights, hotel stays, and car rentals.
- A sign-up bonus if you spend a certain amount in the first few months.
- Some rewards cards have an annual fee.
- In some cases, green credit cards (opens in a new tab) reward more sustainable purchases.
Some best credit cards with rewards can help you pay for your next vacation, vacation shopping, or necessities. Just make sure you can pay your credit card bill in full each month, or your interest payments could wipe out any benefits you would get from a rewards program.
I want a balance transfer credit card to consolidate my debt
If you can’t pay your credit card bill in full each month, you’re said to “have a balance.” When you carry a balance on a card with a high interest rate, you need to carefully plan your next move. When your card’s interest rate is in the double digits, paying the minimum payment each month isn’t a long-term solution and can even push you into a downward spiral of debt. By getting a balance transfer credit card with a 0% intro APR (annual percentage rate), you gain time to repay the debt.
When choosing this type of credit card, you should keep in mind the balance transfer fee (usually between 3% and 5% of the total transfer amount) and the time you have to pay off the debt before the interest rate increases.
I am a student
If you are a student with little or no credit history, a credit card can help you gradually increase your credit score. In the past, students were generally excluded from rewards programs, but now you can choose from a variety of rewards credit cards for students (opens in a new tab). But be honest with yourself. If you think you’re having trouble paying your monthly credit card bill in full and on time, you might be better off sticking with a debit card.
I need to repair or increase my credit score
The past few years have been financially difficult for many Americans; If you’ve hurt your credit score by missing payments or not paying your bills on time, you’re not alone. There are options to repair your credit, but know that there is no silver bullet.
One of the best ways to fix a bad credit score is to use a “secured” credit card. A credit card is “secured” when the borrower makes an initial deposit that the lender typically holds for the duration of the account opening. Deposit amounts can vary but are usually between $200 and $300. Some cards, called “low deposit credit cards,” start with smaller deposits, such as $49, and help borrowers gradually increase their deposit amount.
The “line of credit,” or the total amount a lender can borrow, can be the same as the deposit amount or a little higher.
Apply for the credit card of your choice
By now you should know your FICO score and credit card goals, as well as the best card options for you. Keep in mind that when you apply for a credit card, the issuer will do a “hard checkout,” which means they’ll ask one of three credit bureaus for your credit report and your credit score will decrease for some time. To avoid a blow, you can ask the card-issuing bank (or check the bank’s website) for a quick credit pre-qualification or check in a way that won’t damage your credit score.