What Criteria Should You Use in Choosing a Credit Card?

Choosing a credit card involves more than selecting the first offer. A credit card, used responsibly, can be a beneficial financial instrument, offering convenience, rewards, and a means to establish credit history. An informed decision requires understanding your financial situation and the characteristics of different credit cards to align with your goals and usage patterns.

Assessing Your Financial Profile

Before exploring credit card options, assess your current financial standing. Understanding your credit score is a good starting point, as it provides a numerical representation of your creditworthiness and influences the types of cards and terms for which you may qualify. You can obtain a free copy of your credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once every twelve months, and many financial services offer free credit score monitoring. Knowing your score helps narrow down suitable card options, as issuers often have credit score ranges for approval.

Analyzing your typical monthly expenditures helps identify beneficial credit card features. Reviewing spending on categories such as groceries, gas, dining, or online shopping can reveal patterns. This insight allows you to choose a card that maximizes benefits based on where you spend most frequently.

Considering your ability to pay balances in full and on time is important. If you anticipate carrying a balance, the interest rate becomes a primary concern. If you consistently pay your statement balance in full each month, interest rates may be less of a factor, and other features like rewards could be more appealing.

Finally, consider your financial goals for using a credit card. Some individuals aim to build or improve their credit history, while others seek to earn rewards, consolidate debt, or finance a large purchase. Defining these objectives helps determine the most appropriate card type.

Key Features and Terms to Evaluate

Understanding credit card features and terms is important for an informed choice. The Annual Percentage Rate (APR) represents the yearly cost of borrowing money if you carry a balance. Different APRs exist for purchases, balance transfers, and cash advances, with cash advance APRs often higher. Some cards offer a variable APR, which fluctuates with market rates, while others have a fixed APR.

Various fees can impact a credit card’s overall cost:
Annual fee: A yearly charge for having the card, sometimes ranging from $95 to over $600.
Foreign transaction fees: Typically 2% to 3% of the transaction amount, applied to purchases made outside the U.S. or in foreign currency.
Late payment fees: Charged when a payment is not made by the due date, usually between $25 and $41.
Balance transfer fees: Often 3% to 5% of the transferred amount, assessed when moving debt from one card to another.
Cash advance fees: Typically 3% to 5% of the amount, charged for withdrawing cash, with interest accruing immediately.

Many credit cards offer rewards programs, allowing you to earn benefits on your spending. These commonly include cash back, where a percentage of purchases is returned as a statement credit or direct deposit. Other programs offer travel points or airline miles, redeemable for flights, hotel stays, or other travel expenses. Some cards provide general points redeemable for merchandise, gift cards, or statement credits. Rewards structures can vary, with some cards offering a flat rate on all purchases, while others provide tiered rewards or rotating bonus categories that offer higher percentages on specific types of spending for a limited time.

The grace period is the time between the end of a billing cycle and the payment due date, during which interest is not charged on new purchases if the full balance is paid. Most credit cards provide a grace period, typically ranging from 21 to 25 days. Grace periods generally do not apply to cash advances or balance transfers, where interest often accrues from the transaction date.

A credit limit is the maximum amount of money you can borrow on your credit card. Issuers determine this limit by evaluating factors such as your credit score, income, payment history, and debt-to-income ratio. The credit limit influences your credit utilization, which is the amount of credit you are using compared to your total available credit, and this ratio affects your credit score.

Introductory offers are common incentives to attract new cardholders. These can include 0% APR periods on purchases or balance transfers for a set number of months, allowing you to avoid interest during that time. Additionally, many cards offer sign-up bonuses, providing a cash reward, points, or miles after meeting a specific spending requirement within an initial period, often three to six months.

Selecting the Right Card Type

With an understanding of your financial profile and credit card features, you can identify the most suitable card type.

Rewards Cards

Rewards cards are generally well-suited for individuals who pay their balances in full each month and want to earn benefits on their everyday spending. These cards are categorized by their primary reward focus, such as cash back cards, which return a percentage of spending, or travel cards, which offer points or miles redeemable for travel expenses. Some cards offer general points programs that provide flexibility in redemption across various categories.

Low APR or Balance Transfer Cards

These cards are designed for those who anticipate carrying a balance or wish to consolidate existing debt. They often feature a low or 0% introductory APR for a promotional period, allowing users to pay down debt without incurring interest charges. A balance transfer fee, typically 3% to 5% of the transferred amount, usually applies when moving debt to a new card.

Secured Credit Cards

Secured credit cards serve individuals with limited or no credit history, or those looking to rebuild their credit. These cards require a security deposit, usually refundable, which typically sets the credit limit. Secured cards function like traditional credit cards, with responsible use reported to credit bureaus, helping to establish or improve a credit score.

Student Credit Cards

Student credit cards are tailored for college students, helping them establish an initial credit history. These cards often have more lenient approval requirements and may offer rewards or other student-focused benefits.

Travel Credit Cards

Travel credit cards are designed for frequent travelers, offering benefits such as accelerated earning of travel points or miles, complimentary lounge access, and travel insurance. These cards often provide bonus rewards for travel-related purchases. Co-branded airline or hotel cards can offer specific perks with particular travel providers.

Store or Retailer Cards

Store or retailer cards typically offer discounts or rewards for purchases made at a specific merchant. These cards can provide immediate savings on store purchases. Their use is often limited to that retailer or its affiliates, and they may carry higher interest rates compared to general-purpose credit cards.

Understanding the Application Process

After deciding on a suitable credit card, the next step is the application process. Most applications require personal and financial details to assess creditworthiness. Common information requested includes:
Full legal name
Date of birth
Current address
Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
Annual income
Employment status
You may also need to provide details about your housing costs and how long you have lived at your current address.

Credit card issuers review applications by checking your credit reports and scores, and verifying your income to determine your ability to repay debt. The process is often automated, providing an instant decision. However, some applications may go into a pending status, requiring manual review if there are discrepancies or additional verification is needed.

Applications can typically be submitted online, in person at a bank branch, or by mail. Online applications often provide the quickest response. If your application is approved, you will be informed of your credit limit and APR. Some issuers may provide a virtual card number immediately for online purchases, while the physical card usually arrives by mail within 7 to 14 business days.

If an application is denied or placed under review, the issuer will typically communicate the decision or request additional information. If denied, you are entitled to an adverse action notice explaining the reasons for the denial. Upon receiving your new card, it is important to activate it according to the provided instructions and begin using it responsibly by making on-time payments.