With so many options to consider, choosing a new credit card can be daunting. But for most Americans, it’s a necessary step to establishing credit.
About 92 million Americans have little to no credit history, according to Equifax. With scant information to go on, it’s harder for credit bureaus to assess the likelihood that a person will be able to pay back a loan or line of credit.
One way to build your credit history is by opening and using a credit card.
So how do you decide which card is right for you?
Here are the most important factors to consider when shopping for a new card:
Is your credit score high enough?
Most cards have credit score requirements, among other criteria, so it’s important to figure out what your score is and whether it’s good enough for you to be approved.
But what exactly constitutes a good credit score?
Ted Rossman, senior industry analyst at Bankrate.com, explains that an excellent credit score is “generally defined [as] 740 or higher on the FICO scale, which goes from 300 to 850.” The FICO score represents how likely you are to pay back your credit card bill based off previous payments.
Although many credit cards have a FICO score cutoff of 670, it’s not a strict limit.
“The average FICO score is 716, so most people are in the right ballpark for most cards,” said Rossman.
If you want to raise your credit score, Rossman said the key is paying your credit card bills on time, keeping your balance low and proving that you can successfully manage various types of credit over the long haul. And that can take time.
“Much of this is a marathon, not a sprint,” he noted.
For those who are trying to improve a lower credit score or who are seeking to build credit, Rossman suggests secured cards, which are backed by a security deposit and are often held in a linked bank account. This functions as collateral should you fail to pay your monthly bill.
These cards also have strict limits and do not allow cardholders to spend more money than they deposited upfront. So if your security deposit was $500, your spending limit will be $500.
What rewards does it offer?
There are three main types of credit card rewards – cash back, points and miles.
Cash back rewards pay cardholders a percentage of what they have spent on purchases. The cash accumulated can typically be redeemed in the form of a check or direct deposit, applied to future balances as a statement credit, or sometimes used to make purchases.
Points and miles rewards cards give cardholders the option to redeem their rewards for travel, and other products and services.
Whichever form of rewards you choose, you’ll want to make sure it enables you to get the most out of your purchases.
Start by considering how you spend your money. While some cards offer more rewards for spending categories like travel and dining, others offer better benefits for grocery store purchases and gas. Others will rotate the categories that offer the highest rewards, or even let you choose.
Many people prefer cash back rewards because they are easier to navigate and do not require tracking purchase categories, according to Rossman. He suggests finding a card that gives 2% cash back on every purchase.
If you’re willing to dabble with different cards in order to chase more rewards, Rossman recommends having a cash back card for general purchases, and then layering in other cards for more specific categories.
“Use something like [a general cash back card] as a floor, guaranteeing you’ll never get less than 2% cash back on a given purchase, and lean into categories in which you spend a lot of money,” said Rossman.
Be mindful of fees
While many banks won’t charge you anything just to have a credit card, some rewards cards will charge annual fees, typically ranging from $95 per year to as much as $695.
“For the most part, the better the rewards, the more annual fees,” said David Lord, general manager at Credit.com.
While some of those fees might seem high, they can be worth it if you know you will use all the benefits the card offers.
“These are often travel cards with premium perks” said Rossman. “The annual fee might be well worth it if you’re going to make good use of the airport lounge, the free checked bags or other perks, but not if you rarely travel.”
Another common fee is the foreign transaction fee – which typically adds 3% to the purchase price of products and services bought in other countries. If you travel abroad often, you’ll want to avoid cards that charge such fees.
Most cards will also charge late payment fees.
“Up to $30 for the first offense and up to $41 for subsequent offenses within six billing cycles,” said Rossman.
Another important fee to consider is a cash advance fee. But Rossman advises against using a credit card to get cash. “There’s a separate fee, plus interest starts accruing immediately at a higher rate than normal purchases.”
How high are the interest rates?
While credit card interest rates can go as high as 36%, the average credit card charges about 17%, according to Bankrate. These fees can really add up if you don’t pay off your balance every month. For those who carry a balance, the accrued interest can easily cancel out any rewards the card offers.
“It doesn’t make sense to pursue 1%, 2% or even 5% in cash back (or an equivalent amount of airline miles or hotel points) if you’re paying a high interest rate” said Rossman.
But figuring out the interest rate might not be as simple as it sounds. Cards often charge different rates on purchases versus balance transfers or cash advances. And most credit card issuers offer variable rates, which means they can change over time.
Many cards will also offer an introductory rate – some as low as 0% – for a certain period of time. But cardholders need to be aware that the rate can skyrocket when the period ends.
As long as you’re diligent about paying the card off before the introductory period expires, a 0% rate on purchases can prove to be a big financial benefit. That’s especially true for people looking to make a few big purchases – like a vacation or wedding – early in the term but need a little more time to pay it off.
“You can divide what you owe by the number of months remaining and try to stick to it,” said Rossman. “I think this makes more sense than constantly making a series of purchases with the 0% card.”
Overall, when picking that new plastic, there is no such thing as one-size-fits-all. Instead, it’s about doing the research and finding what works best for you.
“[The] devil is in the details, review the fine print,” said Lord.