Before applying for a new credit card
or continuing to use an existing one, you should be sure it's the right fit for your financial goals. Does the card have an annual fee, and if so, is it worth it? Does the card offer rewards or cash back? What's the interest rate?
With so many credit card options available, it can be overwhelming to choose the card that’s best for you. Here are some general questions to ask yourself when comparing credit cards:
1.) What is Your Credit Score?
Credit card issuers may not share their exact credit score requirements, but they have minimal guidelines for their card products. If you have a good credit score, you’ll have more credit card options available to you than someone with a fair or poor credit history. Checking your credit score before you start the credit card selection process can help you focus your search on cards that you will likely qualify for.
Keep in mind that applying for a credit card will initiate a credit check, commonly referred to as an “inquiry”. Too many inquiries can hurt your credit score, so be sure to only apply for a credit card when you’re positive it’s the one you want.
2.) How Will You Use the Credit Card?
Thinking about how you plan to use your credit card will help you narrow down the options to those that fit your needs. Although it’s not generally recommended to fund an emergency with a credit card, if you are looking for a card to have on hand in case disaster strikes, you should look for one with a high credit limit, no annual fee, and a low interest rate. Unplanned events are often expensive, so you’ll want an ample credit limit to ensure you have the funds necessary to cover your emergency, and a low-enough interest rate that you can easily pay back your borrowed funds.
If you’ll be using the card to conveniently purchase everyday items and plan to pay off the balance in full each month, you might consider a card that offers cash back or rewards for every purchase.
3.) What’s the Credit Card’s Interest Rate?
The interest rate or annual percentage rate (APR) determines the rate at which interest will accumulate if you carry a balance on the card. The higher the APR, the more interest you will be charged on your balance. According to the Federal Reserve, the average APR for credit cards in 2022 was 18.43% compared to just 14.51% in 2021.
While credit card interest rates are certainly high, it’s important to keep in mind that you will only pay interest if you carry a balance on your credit card. If you pay off your balance in full each month, you will not accrue any interest. Paying off your credit card balance each month is what you should strive for, as it prevents you from having to pay interest, and can be beneficial for your credit score, as it helps keep your credit utilization low. Making only the minimum payment on your credit card each month could put you at risk of racking up some serious credit card debt.
Even if you plan to pay off your credit card balance each month, you should still be aware of your card’s interest rate. After all, you never know when an emergency could strike. Different credit cards carry different interest rates. In some cases, rewards cards and travel cards may charge a higher rate than traditional cards. Platinum credit cards or cards with very high credit limits typically have higher interest rates as well.
4.) What Fees are Associated with the Credit Card?
It’s important to understand any fees that might be associated with a credit card before applying. Fees can vary depending on the card, but typical fees include:
- Annual Fees. Plenty of credit cards do not require an annual fee. However, premium cards often have high annual fees to offset the added benefits, such as vacation and travel assistance. If you will take advantage of the benefits offered by the card, an annual fee may be worth it, but you should consider all of your options.
- Late Fees. Even if you always pay your bills on time, you should still familiarize yourself with the late fees your credit card could impose. Make sure you review all of the fine print so you understand what you could be charged in the event you forget to pay your bill on time.
- Balance Transfer Fees. Some credit cards charge a fee to transfer the balance to another card. Those fees can add up, averaging between 3% to 5% of the transferred balance. While you may not plan on transferring a balance, you never know what the future holds. It’s a good idea to look for a card with a low balance transfer fee just in case.
- Foreign Transaction Fees. If you shop online or travel often, you may purchase items that are not sold in U.S. dollars. In those instances, the card issuer may charge a foreign transaction fee. If you think this fee will apply to you on a regular basis, make sure you look for a card with a low foreign transaction fee.
5.) What Rewards or Incentives Does the Credit Card Offer?
If rewards or cash back are your primary reason for choosing a credit card, you'll need to evaluate your options. Typical reward cards include:
- Cash back credit cards
- Credit cards that provide rewards points
- Credit cards that provide airline miles
When choosing a rewards card, consider how easy it is to redeem your rewards (do you have to wait until a certain amount is earned?). You should also understand rules around when rewards expire, which purchases will qualify for rewards, and how many rewards you’ll receive for each qualifying purchase.
If you’re looking for a new credit card, or weighing your options to see if your current card is still the best fit for you, take a look at the credit cards offered by BankFive. Whether you're interested in earning cash-back or rewards, want to transfer balances, or need to build your credit history, we have a card that will work for you.