Credit Card Questions You Should be Asking
For many first-time credit card owners, it can seem like all credit cards are more or less the same. They can have similar spending limits, similar monthly payment requirements and similar-sounding benefits. However, credit cards are far from interchangeable.
Making the right choice for your first credit card is very important. You will begin establishing your credit score, which in the future can help or prevent you from being able to buy the car or house of your dreams.
So what should you be looking for in your first credit card? How can you decide which card is the best for your needs and will set you up for success? Here are some questions you can ask yourself to help determine what factors you should be looking for when you’re just starting out with establishing credit.
What Do I Need My Card to Do?
Although all credit cards do function the same basic way, they actually have several different needs each can uniquely meet. A card will fulfill one of three basic functions:
- Saving you money on interest
- Giving you various rewards
- Helping you repair your credit score when it is damaged
What your personal needs are, therefore, will determine which of these three cards you pursue. For a first-time credit card recipient, it is usually best to start with a safer “starter” card that offers a low annual interest rate (APR).
Some may even want to consider a secured credit card, which requires a deposit payment of up to $200, which is then used as collateral should you exceed your credit limit. This can be a welcomed safety net for someone just looking to establish their credit. These are also the easiest cards to qualify for, with minimal requirements such as being a U.S. citizen and having an address.
However, if you plan to travel often or make large purchases, you will likely want to forego convenience for a card which can offer big rewards and higher credit limits. There are pros and cons to each different type of card, but it’s up to you to determine what your biggest needs are and find a card that is designed to address those needs.
What Rewards Are Best for Me?
There are different cards made to meet different needs. For example rewards cards have various purposes and features that should be considered. If you are planning to travel a lot, you will want to find a card which offers more miles or travel points.
However, if you don’t see a trip on your horizon, what good will those perks do for you? Instead, look for a card that offers merchandise rewards, event tickets or gift cards.
Exploring different rewards programs can make searching for the right credit card fun -- you’ll be able to explore different types of rewards and compare them to your interests. What will incentivize you to use the card, and use it responsibly? How you choose to spend your money, and what card best complements that? Make sure that you pick a card that will work for you rather than trying to find the one that is least likely to work against you.
How Many Card Should I Have?
There are plenty of rumors that exist about credit cards and establishing credit, and one of the most prevalent is that people will hurt their credit score by opening more than one card.
That is not necessarily true -- having more than one card may be a good strategy for some. If you have different needs that can be met by different cards, it may be worth pursuing opening a second or even a third. One may be used to accrue points for travel, while another low-interest card can help as you work towards a big purchase.
However, that doesn’t mean you should nonchalantly start multiple accounts. Your credit score will be affected if you open multiple cards within a short period of time. If you are going to choose to have multiple cards you must be extra cautious in tracking your spending, payment dates and limits with each. If you miss a payment, that could spell trouble for you.
What is My Credit Utilization?
Credit utilization isn’t discussed as often as interest rates or borrowing limits, but it is arguably as important. Credit utilization measures how much of the spending limit you are using on your card. For example, if a card has a spending limit of $5,000, and you have charged $2,500 to that card, the credit utilization is 50 percent. That would be problematic.
Even if you are making on-time monthly payments meeting the minimum, you can still be penalized for exceeding a utilization rate of 30 percent. That doesn’t just mean at the end of a billing cycle either -- if you exceed the threshold at any point on any card, it can cost you.
Therefore, it’s important to pay close attention to your spending rate. Set up alerts for when you begin approaching the 30 percent limit, and keep close track of your spending and payment status at all times. Constant vigilance is the best way to ensure you don’t wind up paying a heavy cost for a simple mistake.
