If you are new to the world of credit cards, you may feel overwhelmed by constant advertising and a plethora of terms and cards being offered. How do you chose which one is best for you, and do you really need one? We're here to help.
Having a credit card (and using it sensibly) can set you up for financial success. A credit card offers a tool for you to build a strong credit history and credit score, which is vital to securing favorable terms for loans such as a mortgage. Here’s what you need to know to get a credit card and use it responsibly.
Credit card basics
As of 2022, most Americans have some credit card debt, averaging from $1,000 to $5,000. About 6% of credit card holders (or 14 million Americans) even hit the $10,000 mark in credit card debt.
While you want to avoid debt, there are times where it makes sense to put expenses on your credit card. Buying items with your credit card, and paying them off can help to build your credit history and your credit score. Some credit cards even offer rewards and perks, like cash back and travel insurance.
Let’s break down what you need to become a wise credit card holder.
Your credit score is a three-digit number that lenders such as banks use to judge your ability to repay your debts. The score ranges from 300 to 850, with a higher number being better.
When you get your first credit card it usually takes three to six months for a credit score to be generated. The initial score will usually be “fair” and fall within the 580 to 669 range. Over time you can either improve or decrease it with how you manage your debt.
Do you miss payments? Do you max out your credit card? It’s generally recommended to use less than 30% of the maximum limit on the card. So if the card’s limit is $10,000, try to put less than $3,000 on it at a time.
Should you get a credit card?
With great power comes great responsibility. A credit card is a powerful tool that can help you build good credit and secure important loans like a mortgage. At the same time, when misused, it can become a quick ticket into debt.
But if you are good at paying your bills on time, there are lots of reasons to get a credit card.
There are five benefits of using credit cards:
Using credit cards can help you build your credit history. When you have a high credit score, lenders and creditors will find it easy to allow you to borrow money.
Some credit cards come with extra perks, such as an extended warranty, theft coverage or damage on electronics and other big purchases.
Credit card users can earn free flights, free nights at hotels, or gift cards through bonus or points programs.
Some credit cards even give you cash back after earning you a percentage of money back from your spending with the card. You can earn anywhere from 1% to 5% back from every purchase.
Credit cards offer an easier option for paying for goods when overseas, serving as a more convenient alternative to debit (which usually won’t work in other countries) and avoiding the trouble of exchanging cash.
Test your credit card knowledge
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How to compare credit card offers
Credit cards come in all different colors, interest rates and limits. There is the “Elite,” “Infinite,” “Gold,” or “Sapphire.” So how to choose? Here’s how to decide what should be in your wallet.
Define your needs
First, you need to think about how you’ll use the card, and see where you stand. Do you need cash advances? Do you need to simply reduce the cost of your high-interest debt?
For example, a secured credit card is pointless for someone with a high credit score, but it can be the perfect solution to build a good credit history.
Understand your interest rates
Understand you interest rates . For example, a secured credit card is pointless for someone with a high credit score, but it can be the perfect solution to build a good credit history.
Whenever you have a balance on your credit card, you will pay interest. For credit cards, you are charged the annual percentage rate (APR), which is the same as the interest rate when it comes to credit card debt. The lower the APR, the less interest you’ll pay on your balance.
APR can be as low as 10% (if you are lucky to find this rate) or over 25%. The rate itself is highly dependent on America’s central bank deciding to increase the prime rate to beat inflation. The average APR was 16% in early 2022 and is now close to 19%.
You also need to understand that most credit cards have variable APRs, meaning they will rise and fall along with economic benchmarks like the prime rate.
The APR rate won’t matter to you if you’re confident that you’ll pay off your balance in full every month. But if you expect to carry a balance regularly, it may be the number one thing you look at.
For example, if you have a $2,000 balance on a card with a 20% APR, you’d pay $400 in interest every year. On a card with a 16% APR, you’d pay $320.
Another note, you can find the APR range that credit cards can charge through the terms and conditions agreements on the carrier’s website, and you don’t need to apply for the card to see the terms.
You won’t know your individual APR until you complete a full application and get approved, as your credit rating plays a factor in the rate you qualify for.
Watch for fees
It isn’t only the APR that you have to worry about when getting a credit card. There are other fees that you need to be fully aware of.
There are many fees, including but not limited to:
- Annual fee: Some cards come with a fee you pay every year for the pleasure of owning and using the card. The annual fee can be worth it, if benefits like cash-back, balance it out.
- Late fee: Depending on the lender, you may be charged a late fee, or charges for not making at least the minimum payment on time. Others charge this as a percentage of the amount you owe or just as a flat fee.
- Balance transfer fee: Some cards will charge you this if you move your balance from one card to the other.
- Foreign transaction fee: While you can use most credit cards overseas, some will charge you this fee for any transactions across the border.
- Cash advance fee: Taking a cash advance (withdrawing cash from your credit limit) can sometimes charge a much higher fee than a regular transaction.
How long does it take to get a credit card
Generally, it can take anywhere from one to three weeks to get a credit card after you have applied for it. The time is influenced by multiple factors, including your credit score and the method you’re using to apply.
When applying for a card, the issuer will typically outline the minimum credit score that you need to apply. If you meet these requirements, you'll often be instantly approved by an automated system.
Keep in mind that this is for online applications. If you decide to apply by snail mail, the approval process will likely take a few extra days.
If you don’t meet the requirements, then your application will need to be reviewed manually, which can take seven to 10 business days. Some issuers have a “reconsideration line” that you can contact in order to speed up this process.
Once approved, the actual shipment of the card usually takes another seven to 10 business days. Some card issuers also offer expedited shipping.
APR vs. interest rate
Your APR is your “annual percentage rate.” For your credit card, your APR and your interest are essentially the same. The APR will represent the amount of interest you pay annually on your balance.
Like your interest, it is displayed as a percentage and the rate that you get is affected by your credit history and credit score.
For other types of loans, such as mortgages, your APR is your interest plus other fees, such as mortgage broker fees.
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Types of credit cards
When getting a credit card, you first have to sift through all the different companies that offer them. Then you’ll also need to factor in the two main types: prepaid and secured.
After you’ve considered that, you also need to think about all the different card types that fall under these main two. Let’s review all the different options you’ll have for your first, or next credit card.
The cards are best when you don’t want to risk going into debt. You preload the card with the amount you wish to spend. The drawback is that a prepaid card does not have any impact on your credit score.
Secured cards are often issued to people with poor credit histories or have no credit whatsoever.
The credit card is backed by a cash deposit from the cardholder. But just like the regular credit cards, you have a monthly minimum payment and once you pay, your viable credit goes up again.
Student credit cards
As the name suggests, these cards are intended for students. They serve as an introduction to credit, offering a lower spending limit than most credit cards, and a chance to build up your credit score at the same time.
Low-interest credit cards
These are ideal for those who may have high balances. With lower APR, it will be easier to pay off your debt. If you have a lot of debt transferring all of it onto a low-rate card may be a good idea (especially if you had multiple cards).
The low rate makes it easier to pay off, and the single card makes it easier to budget and track your progress.
0% APR credit cards
These cards take low interest to another level. The 0% APR typically is not a permanent feature. The offer is given for an introductory period, which could be 15 months or more.
Cash-back credit cards
When you shop with a cash-back credit card, you can get a small percentage of your money back. Some cards only apply cash back to specific purchases, such as groceries. Others apply to everything you purchase.
Rewards credit cards
These are similar to a cash-back card, but instead of cash, each purchase gives you points. The “rewards” you get from these points can range from discounted hotel stays, to free meals, or cheaper gas.
The cards may be usable only with certain types of purchases, such as a specific store.
Airline/travel credit cards
If you travel a lot, having one of these could come in handy. Rewards can include free checked bags or drink coupons.
Your purchases can also rack up frequent flyer miles that you can use to get discounted flights. Keep in mind that some cards are airline-specific.
Small business credit cards
If you own a business, you’ll have supplies and other goods you need to spend on. With a small business credit card you can save money or earn rewards as you shop for these necessities.
They typically have higher credit limits that will allow for bigger purchases needed to get a business off the ground.
No annual-fee credit cards
Some cards, especially rewards cards, can come with annual fees that range from $45 to $95.
With a no annual-fee card you can avoid those charges and still get the benefits of a credit card.
No foreign transaction-fee credit cards
A typical credit card will tack on an extra fee of about 3% for transactions with a different currency.
If you travel often a no foreign transaction-fee card might be worth signing up for since you won’t pay extra on every purchase.
Best credit cards of 2022
Best cash-back credit cards
Unlike travel credit cards or airline credit cards, cash-back credit cards allow holders the ability to cash in rewards no matter what they buy. This opportunity is amplified especially if they combine two or more cash-back credit cards that offer bonus rewards in different spending categories.
Here are our top 10 picks:
Best travel rewards credit cards
You can start reaping rewards when traveling, either through frequent flyer miles, which can only be used to book travel through a specific airline, or through general travel cards, which you often have a redemption choice — travel or cash back.
Credit card rewards
Aside from travel or cash-back rewards, there are other perks that you can get from owning and using a credit card.
These other options include:
- Gas rewards cards: Useful for getting discounts at gas stations.
- Hotel rewards cards: Getting discounts for hotels or specific hotel chains
- Airline rewards cards: Collect frequent flyer miles that you can use to airfare, or for travel bonuses like access to first-class lounges
There are also bonuses and features that you may not consider, like insurance on car rentals and travel. Free upgrades on flights, in hotels or discounts when shopping at certain stores. Some cards even offer concierge services, Uber credits, cell phone protection or free credit checks.
Rewards cards tend to have higher interest rates than regular credit cards, so It’s important to consider how much money you’ll save by getting one.
Can you lose your rewards?
Rewards cards come with conditions that are not too different from a regular credit card.
Missing payments can lead to a loss of your rewards, so can account inactivity. If you have a rewards card, be sure to use it at least once every few months.
Card issuers are also wary of people racking up points with their purchases, only to then return the goods they purchased. To avoid that conundrum, returning goods you purchased will lead to you losing the rewards you accumulated.
There are also cases of people getting cards with big sign-up bonuses, and then canceling the cards shortly after. To combat this, many cards’ sign-up bonuses come with conditions, such as a minimum amount of time from sign up to canceling. If you’re going to get a reward card, hold onto it for at least a year before canceling.
Also, be wary of cards that have an expiry date for their points. This situation is more common if you’re collecting rewards via a points program. Be sure to read the fine print and avoid any surprises on your purchases.
You must also stay up-to-date on the terms of your card. There are instances of the issuer changing the rules or conditions that come with their cards. Such changes require 45-day notice, so it pays to pay attention to any communications you receive from the card issuer.
How many credit cards should I have?+
How do you know if it is time for a second (or third) credit card? If getting another credit card means more spending, then the answer is “no.” And if you have forgotten to pay your credit card bill before, or your budgeting skills need more fine tuning, then the answer is no, once again.
And in case it helps, you have way too many credits cards for you to handle, if:
You’re struggling to keep up with your annual fees.
You forget to pay your cards on time.
You’re paying late fees every month.
You have a high debt-to-income ratio.
Your credit utilization is high.
However, if you are a savvy cardholder who knows how to work the system by transferring to 0% interest credit cards then, yes, another card may be a good idea.
Go for it when your number one target is to combine and maximize the benefits and rewards of multiple credit cards.
In a nutshell, another credit card is a good idea if it won’t lead to you digging yourself deeper into debt.
Can you pay rent with a credit card?+
Did you know that it is possible to pay rent with a credit card?
There are few online services such as Placepay, Plastiq, and Renttrack that can help you pay using your credit if your landlord doesn’t offer it as an option. However, these services come with fees.
Paying by credit can be a good option for emergencies if you are short on cash. You may also be able to get rewards for the payment. However, you will also increase your credit card utilization and increase your debt.
Depending on the processing fee, you could also end up paying more than you would if you paid via cash or an online transfer from your bank. For example, if the processing fee is 2% on $1,500 a month in rent, that means you’ll be paying $37.50 every month, or $450 a year.
Should I get a store credit card?+
Many stores will offer customers a store credit card. There are two types of store cards: Retail-specific or co-branded.
Retail-specific cards can only be used for purchases at a specific store.
A co-branded card is partnered with a major issuer (like a bank) and can be used anywhere credit is accepted.
Store credit cards typically have higher interest rates than regular ones. In 2022, store credit cards reached an industry average of 26.72% interest.
However, these cards are often easier to qualify for. People with low credit scores and little (or no) credit history might be eligible.
If you’re considering a retail-specific card you need to think about how often you shop at the store (or how much you spend) on a regular basis. Are the benefits worthwhile for you?
The card can offer cash back or give you discounts on goods, but there are some drawbacks you need to consider.
Store credit cards typically have much lower limits than regular ones. As we’ve mentioned before, keeping credit utilization under 30% is a key part of improving (or maintaining) your credit score. If you use up a greater portion of the credit on a store credit card, you can still negatively impact your score.
Additionally, the bank that is partnered with the card might conduct a hard inquiry on your credit. That’s when the lender reaches out to a major credit bureau to take an in-depth look at your credit history. This can hurt your credit score.
How can I get a lower interest rate on my card?+
If you are already asking this question, then the money gods are on your side.
The golden rule here really is to always pay your balance, since it is the simplest way to raise your credit score and get a more favorable rate.
A higher credit score shows the credit card issuer that you always do your best to pay down any debts.
Keep your credit utilization or the amount of credit you are using to less than 30% of your total balance. So if your credit card limit is $10,000, do your best not to go over $3,000.
And here comes a nice trick: You can transfer your balance to low-interest cards to help you escape the compounding interest of your debt. You simply open up a new account, and consolidate your card debt onto the new, low-rate card.
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