The start of a new year brings an opportunity for change, including rebuilding your credit. A new credit card is an ideal tool to help you on your journey. When opening a new credit card, understanding the key factors can make all the difference in finding the right fit for your financial needs. Therefore, research and shopping around are essential. Here's what to look for when fielding offers from credit card companies.
1. CREDIT SCORE REQUIREMENTS
The credit card industry doesn’t require customers to have specific credit scores to qualify. As a result, each company has unique standards for applicants, meaning you may qualify for a card with one company while experiencing rejection from another, despite applying with the same score.
However, borrowers with at least a score the industry considers “fair” (580 to 669) have a better chance of qualifying. In addition, a higher credit score can help you receive a higher credit limit and a better interest rate. The credit score ranges are as follows:
- Excellent: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
If your credit score is on the lower end, you have a couple of options. First, you can shop around and try to find a credit card company with low or no credit score requirements. Remember, these companies may offer fewer amenities, meaning you’ll have limited customer service engagement, no rewards/perks, and higher fees. Second, you can spend several months improving your credit score before applying. For instance, repaying a lingering debt and making loan payments on time can boost your score.
2. BENEFITS AND REWARDS
Getting a credit card with benefits and rewards tailored to your spending habits can provide cash back, exclusive deals, and discounts on purchases. Here's a guide to help you select the best one for your situation:
Assess Your Spending Habits:Track your expenses for a few months to understand where you spend the most. Categorize expenses like groceries, dining, gas, and entertainment. Then, identify which categories are the most significant in your spending. For example, if you travel frequently, you might prioritize travel rewards. If you're an all-around spender with no particular bent, a general cash-back rewards card for all purchases can put money in your pocket each billing cycle.
Research Rewards Programs: Look for credit cards with rewards and benefits aligned with your spending habits. Many banks and financial institutions offer cards with specific rewards for different categories or lifestyles. Reviewing multiple credit card options will help you find one that best matches your spending patterns. Consider factors such as annual fees, interest rates, rewards structure, and any additional perks (like zero foreign transaction fees, lounge access, or cash back).
Check Eligibility and the Terms and Conditions: Ensure you meet the eligibility criteria set by the issuer, such as credit score, income, and employment status. Also, before you apply, carefully read and understand the terms and conditions of the credit card. Pay attention to interest rates, fees, and reward structure. Remember, some cards have introductory rates and fee-free periods that change after a specific period, such as six months or a year.
3. TYPES OF CREDIT CARD FEES
Credit card fees often apply even if you pay your balance on time. As a result, they usually increase the cost of maintaining the account. However, these fees aren't prohibitive by definition and can be worth the price if the card provides sufficient benefits.
An annual fee is a yearly charge your credit card issuer stipulates for using their card. Rewards or premium cards that offer excellent perks have an annual fee. The annual fee helps cover the costs associated with providing benefits and rewards to cardholders, such as travel perks or cash back.
Annual fees can range from zero to several hundred dollars, depending on the card's benefits and prestige. In addition, some credit cards waive the annual fee for the first year, while others may offer waivers if you meet certain spending thresholds or are a preferred customer.
Remember, a high annual fee doesn't imply an unfair deal. For example, the American Express Platinum Card has a $695 annual fee. However, the card provides thousands of dollars in annual rewards if you take advantage of the travel and entertainment benefits.
5. BALANCE TRANSFER FEE
Credit card companies charge a balance transfer fee if you transfer an existing balance from one credit card to another. Typically, this fee is a percentage of the transferred amount. For example, a 3% transfer fee for a $10,000 balance results in a $300 charge. Remember, this fee applies independently of the APR, even if the interest rate is zero. A balance transfer is beneficial despite the fee because it helps you consolidate high-interest debt, often giving you a year to pay it off before charging interest.
6. LATE FEE
A late fee occurs when you fail to make at least the minimum payment on your credit card by the due date. Late fees can vary but are usually between $25 and $40 for the first occurrence and can be higher for subsequent late payments within a certain period.
7. FOREIGN TRANSACTION FEE
A foreign transaction fee is for a purchase with another country's currency or an overseas merchant. It covers the costs associated with currency conversion and processing international transactions. Foreign transaction fees are usually around 1 – 3% of the purchase amount. If you travel frequently, a credit card that doesn't charge foreign transaction fees is an excellent tool.
8. ANNUAL PERCENTAGE RATES (APR)
Annual Percentage Rate (APR) is the annualized interest rate companies charge when customers carry a balance on their card. Credit card APR is expressed as a percentage and represents the cost of borrowing over a year, including the interest rate and any associated fees. For instance, a 25% APR with a $1,000 balance will incur a $250 interest charge. Remember, you can avoid APR by paying your balance at the end of each billing cycle.
Some credit cards offer a lower, often 0%, introductory APR for a specific period. This perk is beneficial for balance transfers or large purchases, but remember to note when the regular APR will kick in.
Cards can also have variable APRs that track with a specific benchmark, such as the prime rate. This feature results in an interest rate that rises and falls over time, making the cost of borrowing unpredictable. That being said, APRs are generally higher than interest rates for other forms of debt, making credit cards more expensive than personal loans, home equity loans, and student loans.
9. CREDIT LIMITS
The credit limit is the maximum balance you can carry on your card. Credit card companies base your credit limit on your credit history, credit score, and financial strength. After you qualify for a specific credit card, the company will inform you of the credit limit.
Remember, the credit limit you receive upon qualifying isn't set in stone. Companies typically evaluate your account for a credit limit increase after several months or a year. However, if your company is slow to take the initiative, you can request a limit extension. In this case, your company may perform a hard credit check to determine your reliability with a higher limit, dinging your credit score for a short period.