Whether it’s your first or fourth go-round, opting for a new credit card is a decision that will impact your financial health in one way or another. Having a credit card can be a boon when it comes to building or maintaining a good credit history, but it can also be a gateway to debt, depending on what type of spender you are.
That said, the decision to apply for a credit card shouldn’t come without a careful analysis of your personal financial spending habits and goals, because a credit card isn’t something you can erase down the road once you start to establish or re-establish your credit without feeling some effects. In fact, experts have told Bankrate that closing credit card accounts that have been around for a long time can negatively impact your FICO Score — which drives your creditworthiness — by shortening the length of your credit history. Although the length of your credit history accounts for only 15 percent of your FICO Score, lenders still like to see a seasoned track record in repayment.
If used responsibly, a credit card can help you build the credit history you need to “access financial support,” as Rasha Katabi, CEO and founder of Brim Financial, puts it. “Whether it’s in a mortgage or a loan or a business loan — whatever it is that you require in terms of financial support to build your business, your life and your wealth — it’s important to have credentials in the world of credit.”
Credit cards can also help you save (and earn) money, especially if you opt for one that offers rewards, points and/or miles in some of the categories in which you spend the most heavily. “Find a credit card that best suits your spending habits and has the best cash back or reward program for your priorities in life,” wrote Kelan Kline, personal finance expert from The Savvy Couple, in an email to Bankrate.
Credit cards can be valuable tools in navigating and managing your finances. Here are a few things to consider before deepening — or beginning — your credit card journey.
When to consider getting a credit card
If you want to build or rebuild credit history
You first need to understand where you are in order to know where you want to go. Before deciding on a credit card or being persuaded by a large sign-up bonus, you should be aware of your credit score and financial standing. Using a credit card can be an efficient way to boost your credit score or establish the groundwork for a credit history. Without sufficient credit history, lenders will likely see you as a higher risk — and this may or may not result in a denial of that loan or mortgage you want.
If you have limited or no credit, consider a secured credit card. In order to compensate for your lack of credit, lenders will require you to submit an initial deposit that will set the basis for your line of credit or what you’ll be able to borrow. Your payment history may then be reported to the three major credit reporting bureaus — Equifax, Experian and TransUnion.
How to build or rebuild credit
In order to see your FICO Score increase, Beverly Harzog, personal finance and credit card expert for U.S. News & World Report, says it’s important to make your payments on time and in full and to keep your credit utilization ratio below 10 percent. Although she says the “golden rule” is around 30 percent, people with high credit scores keep it around 10 percent. “You know, use a low utilization ratio — below 10 percent, really — to boost your score, and pay your bill in full and on time. Do that for seven or eight months and you’re going to see some progress,” Harzog said.
When to graduate from a secured credit card
The answer depends on how you use the secured credit card. And, truthfully, you’ll probably want to keep it for a while, especially if it’s your first credit card.
Harzog says some issuers, like Discover and Capital One offer pathways to helping people transition from a secured to an unsecured credit card after responsible use. The OpenSky® Secured Visa® Credit Card, on the other hand, doesn’t require a credit check to apply, but it also doesn’t have a designated next step for when you’re ready for an unsecured card. “Let’s say you go get that one [OpenSky], and after nine to 12 months, you’re in the fair credit score range…But you’re going to have to apply to another issuer,” Harzog said. “So you should still keep that secured credit for a while, because it’s part of your new credit history, and that available credit helps your score — so don’t make any sudden moves about that.”
If you need help financing a purchase or paying off debt
Some credit cards, like zero percent interest cards, offer lengthier zero percent APR periods on purchases and balance transfers. These cards typically don’t offer the highest rewards rates or sign-up bonuses, but if you need some leeway when it comes to financing a major purchase or know you’re going to need some extra cushioning in paying off a debt, you might want to consider one of them. The intro offer will allow you to pay off your debt or major purchase in installments for the duration of the introductory period, and then “you’ve been able to get a loan interest-free, basically,” Harzog says.
If you want to optimize your spending
Using a cash back or travel rewards credit card responsibly can help save you money on some of your most frequented purchases. Again, you really need to think about how you spend your money in order to garner rewards for the things you purchase the most. Otherwise, you could be spending way out of your budget for something you wouldn’t normally just to reach that, say, $500 sign-up bonus.
You don’t necessarily need an excellent credit score to qualify for a rewards credit card and start earning money on your spending habits. Banks and creditors consider those with a FICO Score of 670 to 739 as having “good” credit, a range that could help you land some of the best credit cards out there. You likely won’t see the lowest interest rates or highest credit limits with this type of score, but if you set a budget and plan to pay your bills on time, you could be leaving money on the table by not using a rewards credit card.
“My wife and I have been able to completely pay for a handful of vacations over the last few years by simply using a travel rewards card each month,” Kline said. “These are vacations we might not have even gone on if they were not paid for by travel rewards.”
If you want added payment security
Debit cards are usually good for those who need help sticking to a budget, as the funds drawn from debit accounts are pulled from your money. However, if your debit account is compromised or fraudulent charges are made, the process of recovering your funds can get a little trickier. The Electronic Funds Transfer Act (EFTA) ensures you zero liability for fraudulent charges made on your debit card if you report the fraud within a 60-day window. If you wait more than 60 days, you could be footing the entire bill for that fraudulent charge.
While it’s nice knowing you have some protections, bear in mind that banks and credit unions may require a written confirmation of the error and have to complete the investigation within 10 business days. This means you could be lacking those funds for almost two weeks.
You won’t have to deal with these types of pains if you find a fraudulent charge on your credit card. Your real money isn’t on the line, and issuers typically offer some form of zero liability policy on fraudulent charges. “If you find suspicious charges, you report them, they get wiped off, and you don’t have to pay for it,” Ted Rossman, industry analyst at Bankrate, told us for a story on the Apple Card.
There are federal protections in place for credit card fraud, too. The Fair Credit Billing Act (FCBA) caps your liability on charges you didn’t make at $50. You still have a 60-day window to report, but you’re not dealing with your immediate funds in the meantime.
When to avoid opening a new credit card account
If you want a way to augment funds
Generally speaking, applying for more credit to get out of debt can put you in the midst of a catch-22. If you’ve given meticulous thought as to why you want a credit card, how you plan to use it and know you have the funds to pay off your statements, then you might be ready for a credit card.
“Whether it’s a secured card or regular unsecured credit card, and they’re trying to build their credit history, or they’re trying to take advantage of the rewards and perks, I would say any time is a good time,” said Colin Walsh, CEO and co-founder of app-based banking service Varo. “If you’re feeling like you’re getting the credit card because you need that little bit of extra cushion, or you want to borrow against it, and you’re seeing it as a form of lending, I would be a little bit more cautious of that.”
Knowing how responsible a spender you are can also let you know whether you’re ready.
“Now, there is one other situation where you should never get a credit card,” Harzog said. “And that’s if you can’t use cards responsibly…there’s no shame in that. We all have weaknesses, so just be honest, and if that’s the situation you should not use a credit card.”
Impulse buying can lead to carrying hefty balances. In turn, hefty balances that aren’t paid in full can accrue a substantial amount of interest.
If you’ve recently applied for a major line of credit
You should also avoid applying for a new credit card if you’ve recently placed another major credit application. This means if you’re about to refinance your house, buy a new car or open some form of loan — you’ll want to avoid a credit card application and the added hard inquiry it will place on your credit score.
Not only will applying for a credit card around the same time as a personal loan decrease your credit score, it’ll also make lenders suspicious of you. “A lender who is trying to approve you for a mortgage might see that and think, ‘Why is this person also applying for a credit card? Are they expecting to have money problems if I give them this mortgage?’ All of these things can go through lenders’ minds,” Harzog said.
Finding the right time to apply for multiple credit cards
Having more than one credit card can help minimize your credit utilization ratio. On the other hand, according to Walsh, having lots of credit cards “puts a lot of temptation in your wallet.” Deciding the magic number of credit cards for your lifestyle, again, involves an honest analysis of your budget and goals.
You want to avoid applying for multiple cards at once, as this will impact your credit score. “If you’re not planning on applying for a major credit application any time soon, let’s say you’re not going to do that in the next year…you could probably get two cards and spread it out over four months,” Harzog said.
Opening a credit card account could be one step further toward reaching your financial and personal goals. But managing it requires diligence and an analysis of your resources and spending habits.