What Should I Consider When Shopping for a Credit Card?

There are two primary attributes to consider when shopping for a — its value to you financially and its value to you credit-wise.  Is it helping you save money and boost your credit score?  Here are seven things to consider when you shop for a credit card:

1. Be wary of store cards. The main advantage you get with a retail card is discounts and special sales. If you carry a balance, the interest rate is higher on retail cards and can only be used at that particular merchant. If you have cards that can only be used at one place, you have to have a lot of them. If you open many new accounts in a short period of time, it can hurt your credit score.

2. Pick a flexible offering. You want a card that is convenient and can be used anywhere such as gas stations, grocery stores, department stores, restaurants, hotels and airlines. In addition, you want cards that offer the best terms including interest rates.

3. Take your spending and debt history into account. Will you carry a balance (revolve) or pay in full each month?  If you’re going to revolve a balance, the interest rate is instantly more important. However, if you pay your balance in full every month, choose a higher rate over paying an annual fee.

4. Figure out exactly what you’re getting for that fee. I don’t usually recommend cards that charge an annual fee, but if there are benefits that cancel out the fee, consider it. Issuers may waive the fee for the first year; this gives you a year to determine the value.  Be careful, you don’t want to open an account that you will want to cancel in a year; this doesn’t help your credit.

5. Seek a high credit limit. It is important to get the highest credit limit for which you can qualify.  You don’t want to reach the credit limit, but a higher credit limit helps your utilization ratio which can increase your score.  The less you use of your available credit improves your score. Retail or store credit cards have low credit limits which can impact your credit score.  The amount you owe makes up 30 percent 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. Some issuers don’t report your credit limit, but the most you have charged on the card. From the issuer’s standpoint, this is a competitive advantage. 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, the purpose is to get you to switch cards.

By only reporting the highest amount charged can hurt your credit score.  Your utilization ratio will look higher than it actually is. 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. 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’. 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. Miles sound very attractive because you envision yourself taking a vacation, but the problem is the terms and conditions. Often there are so many restrictions such as blackout dates or more popular times and you have to pay double mileage to use the free tickets.  If you are not a frequent traveler, mileage rewards aren’t a good deal for you.  Cash doesn’t have a blackout date.

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Credit Report, Credit Score, Debt, Money & Identity

This post was written by John Ulzheimer