Picking out a Credit Card in 5 Easy Steps

Picking out a Credit Card in 5 Easy Steps

by | Aug 29, 2018 | Money

You guys, credit cards can be scary. I remember when I started looking for my  first credit card. I knew that credit cards could get you in a lot of trouble. I also knew that I might not be approved, and that applying for too many would hurt my credit, which made me afraid to apply for any. And that’s pretty much all I knew. Years later, I know A LOT more about picking out a credit card, plus I’ve learned it’s not nearly as scary as I thought it was. Here’s what you need to know about choosing the right credit card.

#1 – Look at the APR

You’re probably somewhat familiar with that fun little acronym. It stands for Annual Percentage Rate, and it basically dictates the amount of money a credit card company can charge you if you don’t fully pay off your credit card each month. Say you have 14% APR and you spent $1,050 on your credit card last month. You pay the minimum of $50, so the other $1,000 on the statement is what you’ll pay interest on. Different companies calculate this differently, so you’ll have to ask your bank exactly how the APR is calculated. Here’s the thing, if you’re using your credit card right, the APR shouldn’t matter too much. The reason is because you should be paying off your credit card balance in full each month anyways. If you don’t, it can cost you a lot of money and hurt your credit. So take a look at the APR when you sign up for a credit card, but know that it’s not the most important factor unless you plan on getting yourself into debt with said credit card.

#2 – Figure out the Fees

Most credit cards have an annual or sometimes even monthly fee. This is more important than the APR because it’s completely outside your control. Look for credit cards with no or really low monthly fees. The only exception is if you plan on using a credit card for its specific perks AND if those perks outweigh the annual fee.

#3 – Consider the Perks

There are a lot of different perks that credit cards can offer. You can get different percentages for cash back for different categories or collect travel credit. Think about what’s going to be the most valuable to you and whether or not you’ll be able to use the credit cards for their perks. Don’t be too drawn in for the sign-up bonuses they offer, especially if you have to spend way more in the first 3 months than you normally would. Oftentimes they’ll give you an extra bonus if you spend in the range of $4,000 in the first three months. But if you  normally only spend $3,000 in three months, then the bonus is going to need to be more than $1,000 for it to be worth it to you. As far as monthly perks, even if you’re only getting 1% back, that’s free money. Unless you’re not paying off your monthly balance. If you only use your credit card for $200 of groceries each month and get 1% back on that, that’s only $24 a year, which sucks if your annual fee is $100. These are the types of things you need to evaluate when you’re picking out a credit card. Be realistic about your spending habits and also of your current financial situation.

#4 – Preapproval: What it is, how to use it

One helpful thing credit card companies do is let you see if you qualify for preapproval. This isn’t any guarantee that you’ll be approved for the credit card once you apply, but it should give you a good indication. It’s basically a soft check on your credit, which is helpful since too many hard checks can hurt your score.

#5 – Low or no credit? Try this.

If you somehow made it out of college without getting a credit card, you might discover that it’s harder to get one now, especially if you have either low or no credit. A good option for you is to use a secured card, which is sort of like a credit card with training wheels. It gives a credit card company an opportunity to see how well you do with a credit card since there isn’t any other data (credit history) to go off of. Here’s how it works. You give them a certain amount of money, usually a few hundred dollars, which becomes your limit. Each month you pay your bill like it’s a normal credit card and it will start slowly building your credit. After a few months, they should graduate you to a normal credit card. Make sure you read up on the secured card to ensure that they WILL graduate you to a regular credit card. Also make sure that they report your payments to credit bureaus, otherwise it doesn’t actually build your credit.

That’s pretty much it

No seriously, those are basically the only things you need to look at when you’re picking out a credit card. Of course, there are other things related to having a credit card that you’ll probably want to know too. Half the anxiety about picking out a credit card is knowing whether or not you can use it the right way! Here’s what you need to know.

Now that you have it, use it well!

Pay off your monthly balance!

This can’t be stated enough. It seems so simple, but so few people actually do this and really suffer because of it. Credit card companies make their money off of people who don’t pay their  balance each month. Be one of the few that actually gains money from their credit card. One of the best ways to ensure that you pay off your monthly balance is to set up automatic payments. With my bank, I can set it up to pay the minimum balance, the statement balance, or another balance of my choosing. Set up your automatic payments to AT LEAST pay the minimum each month, in case you forget. Missing a payment entirely is the quickest way to hurt your credit. I’d highly recommend setting it up to automatically pay your entire statement balance though.

Don’t forget about their extra perks!

In order to get the most out of your credit card, make sure to read up on all the perks they offer. This can feel tedious, but it could save you hundreds of dollars. Most credit cards offer purchase protection, which is awesome. It’s essentially an extended warranty on everything you buy with that credit card. So if your iPhone breaks three months after you bought it and you opted out of Apple Care, see what your credit card company can do for you. Credit cards also often provide things like free rental car insurance. Make sure you know what they have to offer! Some credit cards require you to use your cash back or travel vouchers within a time period or you lose them. Don’t lose them! Pay attention to whether you need to opt-in to certain cash back rates or use your points by a certain day.

How it will affect your credit score

When you first sign up for a credit card, it might lower your score at first. That’s because credit checks can affect your score. In the long run, though, it’ll raise your score (if you use it right!) because you have to have credit in order to show that you’re responsible with credit. The best thing that you can do for your credit score is to pay off the balance each month.

Other important things to know

We touched on the statement balance vs current balance vs minimum payment before, but I think it’s worth defining them again because I found these terms really confusing at first. Statement Period: You’ll get 12 statements a year from your credit card, each covering a length of time (about a month) called the statement period. You’ll have to check your last statement to see when your statement period begins and ends, as the dates can vary depending on the company. A statement’s due date must fall on the same day each month. For example, your statement period might be from August 6 to September 5th. Statement balance: All the money that you put on the card during that time frame (August 6-September 5 if using the example above) will be your statement balance. Your bill for that statement period will be due at least 21 days after the statement ends, so September 26th or later. Again, this varies depending on the credit card, so make sure you check your statement so you know when to pay your bill. Current balance: This is just what it sounds like–everything on your credit card (that hasn’t been paid off yet) to date. Usually your statement balance will be lower than your current balance. Minimum payment: This is the minimum amount you’re required to pay on the credit card without it being considered a missed payment. The minimum payments are usually very low. If all you do is pay the minimum payment, it could take you 20+ years to pay off some balances without even adding more money!

Don’t Overthink it

I know I probably just gave you information overload, but this is seriously ALL you need to know. Don’t overthink it. You have all the knowledge you need now to make an informed decision. Weigh all the options and pick the one that’s right for you. You’ve got this. Wanting to learn more about your personal finances? I also have information on the following topics:
How to Check Your Credit Score and Why It Matters

How to Check Your Credit Score and Why It Matters

by | Aug 15, 2018 | Money

Credit scores and credit reports can feel like really murky waters. Figuring out what a good credit score is can feel daunting, let alone even figuring out how to make yours better. I remember being afraid of checking my credit score for years because I was worried it wasn’t excellent. That and for some reason figuring out the actual steps to find out what it was felt unknown and overwhelming. But don’t worry, everyone has to start from the bottom, and the basic rules are pretty simple to understand. Here’s all the essentials on how to check your credit score.

Why Your Credit Score Matters

Knowing why you should work on your credit score is the first step. It seems like one of those things only your distant future self will need to worry about. That could be true, but it takes years to build your credit score, so the sooner you start, the better. Here are some big reasons why your credit score matters.

It can affect your ability to rent a home

According to NerdWallet, nearly 1 in 2 landlords say that your credit history is one of the top factors in deciding whether or not to accept your lease application. If you have a bad credit score, that could seriously affect where you can live, especially if you’re living in an area where the housing market is more competitive.

You might not be able to buy a home

Unless you’re paying in cash, your credit score can definitely affect whether or not you’ll be able to get a mortgage. It can also affect how much interest you pay, even if you are approved for a home loan. 

Credit checks can be used as part of the hiring process

Your credit score, aka the 3 digit number, isn’t necessarily looked at by employers, but your credit history can be. They might look at your history to see whether you’ve been a reliable person when it comes to paying your bills, as that can be an indication of whether you’ll be a reliable employee. 

You might not qualify for mobile phone deals

If your credit score is really low, you might be stuck with a pay-as-you-go plan. The best mobile phone deals are usually reserved for those with excellent credit scores. 

It can make your car insurance payments higher 

This seems like a pretty raw deal, but it looks to be true. Having a low credit score might make it difficult to get good insurance rates, depending on where you live.

You might not qualify for better loans or credit cards

When you’re buying a car or applying for another type of loan, you might end up getting a much higher interest rate than you would if you had a high credit score. You also won’t be approved for credit cards with the lowest fees + interest rates and the best perks.

What Your Credit Score is Based On

Now that we know WHY it matters, what actually determines these mysterious and important three little numbers? Quite a few things actually. 

Your payment history for loans and credit cards

It’s really important to pay all of your bills on time and in full. The longer you do this, the more it helps you. 

Your credit utilization rate

This only involves your revolving credit (aka credit cards). You take the amount that you owe and divide it by the total limit and that’s how you get your credit utilization rate. So if you have two credit cards with a limit of $5,000 on one and $5,000 on the other, your total limit is $10,000. If you owe $1,500 on one card and $1,500 on the other, you’ve utilized $3,000 — so your credit utilization rate is 30%.

You’ll want to keep your credit utilization rate at 30% or lower (preferably lower. Some experts say lower than 20% or even 10%). One thing to keep in mind is the utilization rate per card. You don’t want to put $3,000 on one card, because then the utilization rate for that card would be 60%, which can also hurt your credit, even if your TOTAL utilization rate isn’t above 30%.

Type, number, and age of credit accounts

The longer you’ve had a credit card that you regularly pay off, the more reliable you look to lenders. It’s also more rewarding to have a mix of different types of credit (fixed loans vs. revolving credit). This is probably going to be a credit card and a student loan or car loan. Before you go out and get that car loan, look into how much it will boost your credit score. It usually isn’t worth it. 

Number of inquiries for your credit report

You certainly don’t want to go out and open multiple new accounts all at once. For one, this makes you look desperate. Lenders will wonder why you suddenly need all the money. Two, this will affect the number of inquiries for your credit report. And last, it’ll cause the average age of your credit to go down significantly.  

Credit score vs credit report

So what’s the difference between a credit score and a credit report? 

The credit SCORE is the 3 digit number, ranging from 300 to 850. The credit report is all the things that go into your credit score. Things like credit cards, number of on-time payments, number of loans, etc. ALL the details go into your credit report. 

A credit score is generally considered good if it’s in the range of about 650-720. A score is often considered to be excellent if it’s 720 or above. I’ve seen different opinions on different websites, however. 

There are Three Different Credit Scores???

Just when you thought you had this figured out, I tell you that you actually have three different credit scores. This is because there are three different bureaus that gather this information, and they each create your score a little bit differently.

  • Experian
  • Equifax
  • Transunion

They all pretty much use the same information, though sometimes certain landlords or creditors won’t report to all three bureaus.

Where to Check Your Credit Score

Credit card / bank account

A lot of bank accounts and credit cards are doing this fun thing where they give you your updated credit score every so often. We have bank accounts at Capital One and I can regularly check my credit score there.

Mint

You can also see your credit score at Mint.com. Once a month it’ll allow you to get an update and shows you all the different factors going into your credit score. I get excited to refresh it every month. It feels like a game and I get to see if I can bring my score up.

Annualcreditreport.com

Under federal law, you’re entitled to one free credit check with each bureau per year. It’s always a good idea to take advantage of this. If you’ve never checked your reports or it’s been a long time, go ahead and pull all three reports at once. Otherwise, consider pulling one report every four months so that you can take a peek more frequently.

Also bear in mind that this website will give you your credit report, not your credit score (see above). But since it’s so easy to get your credit score from other places these days, it’s hardly worth paying money somewhere to get that info.

What if something on my credit report is wrong? 

Maybe you just checked your credit score (good job, friend!) and realized that there was something wrong with it. Before you panic, you should know that you can actually dispute things on your credit report. If there’s a substantial error on your credit report that you get fixed, it can cause your score to go up by 25 points. According to the FTC, 1 in 20 people have substantial errors on their credit report, so it’s definitely worth looking into.

You can find a more detailed explanation of how to dispute something on your credit report here. 

How to improve your credit score

It can feel like a long arduous process, but starting now will definitely help in the long term. There are some easy fixes that can improve your credit score right away.

  • Keep paying your bills on time
  • Pay off your credit card in full each month
  • Use less than 30% of the max limit, but preferably less
    • Paying off your card weekly or bi-monthly might help with this! 
  • Dispute incorrect charges
  • Don’t apply for credit too frequently
  • Ask your credit card company to increase your limit

Over time, you’ll see your credit score gradually increase. 

What if I don’t have a credit score at all? 

If you don’t have a credit score at all, the best thing you can do is apply for a credit card. For some reason, credit card companies make it easiest to get your first credit card when you’re in college. You can usually see if you’re pre-approved before applying for a credit card. This will give you an idea of whether you’ll be accepted without putting an unnecessary credit check on your credit report. 

If you’re NOT in college and have no credit, then a secured card might be the best way to go. This is basically a credit card with training wheels. You start with a deposit, usually around $300 to $500, which acts as your limit. You’ll want to make sure that your payments are reported to credit bureaus so that it actually does improve your credit score. 

Now it’s your turn! 

How to Check Your Credit Score and Why it Matters - Everything you need to know about credit reports | www.kelseysmythe.com

Best of luck as you put these steps into action and start improving  your credit score! As you’re working on improving your financial literacy and getting in control of your finances, consider bringing your friends along with you. A lot of times personal finance is a taboo topic, but not talking about it is only hurting us! Feel free to share this post with a friend who’s interested in feeling educated and in control about her money too. 

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