Seven Secrets to Choosing the Best Credit Card
In the past, we've discussed choosing the best credit card for your age, or for holiday shopping, but this time, to find out what priorities you should consider and what questions you should ask yourself before signing up for any new credit card, we turned to John Ulzheimer, president of consumer education at SmartCredit.com, to get his advice."There are two ways to look at a credit card -- its value to you financially and its value to you credit-wise," Ulzheimer says. In other words, how much is it helping you save money, and how much is it helping you boost your credit score? Keep these two things in mind and then follow Ulzheimers's guidelines for choosing your next, best credit card:
1. Be Wary of Store Cards.
Ulzheimer points out that store credit cards generally don't have much to offer in either regard. Yes, you might get a discount off your purchase, but if you revolve a balance, that discount will be canceled out and then some by the very high interest rates retail cards typically carry -- generally in the 25% range, even for people with excellent credit. What's more, Ulzheimer points out, retail cards can generally only be used at that particular store and its affiliates. "If you have cards that can only be used at one place, you have to have a lot of them," he says. Opening multiple new lines of credit, especially in a short period of time, is harmful to your credit score.
2. Pick a Flexible Offering
The first criteria you should have for a credit card is that it has broad usability; you want a card that you can pull out if you're at the gas pump, grocery store or the mall. Aside from the convenience factor, says Ulzheimer, "generally, those cards are going to have better terms right out of the gate."
3. Take Your Spending and Debt History into Account
The major question you need to ask yourself when choosing a card is whether or not you'll revolve a balance. Consider your current spending and credit-use habits, and be honest with yourself. "If you're going to revolve a balance, interest rate is instantly more important," Ulzheimer says. However, if you pay off your balance in full every month, you don't need to be as concerned with the APR. In this case, Ulzheimer advises, "I'd choose a higher rate over paying an annual fee if I know I'm not going to revolve a balance."
4. Figure Out Exactly What You're Getting for that fee
While we tend to recommend cards that don't carry annual fees, the levying of a fee isn't necessarily a dealbreaker if the other benefits the card confers cancel out the cost of the fee. Keep in mind, as well, that many issuers will waive the annual fee for the first year. Use that as kind of a "trial period" to see if you're really using the benefits for which you'll be paying in subsequent years via the fee.
5. Seek a High Credit Limit
The next step in choosing a card is to search for the highest credit limit for which you can qualify, Ulzheimer says. But the high credit limit isn't a license to shop, he cautions; rather, it gives your utilization ratio a boost and can help you attain a higher credit score. Store cards, for instance, usually have low credit limits, which can hurt your credit utilization ratio -- a crucial component of your credit score.
6. Determine How your Limit Will be Documented
"I also think it's important to pick a credit card that reports accurate limits to the bureaus," Ulzheimer says. While most cards will reflect your credit limit accurately, some issuers won't report a limit, or will report your highest recent balance as your credit limit. From the issuer's standpoint, this is a competitive advantage, says Ulzheimer. If their competitors can see your credit limit for Card A, they can send you a solicitation in the mail for Card B -- with a higher limit.
Unfortunately, obscuring your credit limit has a cost, and it's your credit score, since it's almost inevitable that it will make your utilization ratio look higher than it actually is, Ulzheimer warns. There are two steps you can take to avoid this: First, be wary of cards that advertise no preset spending limit, since these may use your highest recent balance as your limit. Secondly, go online and do a little bit of investigation before you apply for a card, Ulzheimer suggests, since call center customer service employees are unlikely to know this detail.
"The best way is to go online and Google the name of the card you're looking for and add the phrase 'credit limit reporting,' " he says. Otherwise, you won't know until you pull your credit report and see how your limit is reported.
7. Evaluate your Reward Usage
"The two primary offers are cash and airline miles," Ulzheimer says. "Miles sound very attractive because you envision yourself taking a vacation, but the problem is the terms and conditions." Blackout dates, expiration dates and similar restrictions imposed by many cards means you might never get those free tickets. If you're a regular traveler, miles can be a good deal, but if you're a homebody, stick to cashback rewards. After all, Ulzheimer points out, "Cash doesn't have a blackout date."