Look at These 6 Factors When Choosing a Credit Card

Besides personal loans, credit cards are one of the most common ways of borrowing money. According to TransUnion, there are over 167.2 million credit card holders in the U.S. 

The typical American credit card user has an average of 4 credit cards and an average of $7,951 in credit card debt.

These statistics show the importance of credit cards in our daily lives. But how much time do we spend researching the right credit card before applying for one? And no, getting bribed with pizza in exchange for applying for a credit card might not be the best strategy.

There are at least 10 types of credit cards including premium, student, and travel credit cards offered by market leaders like Visa, Mastercard, and American Express. And there are hundreds of credit cards under each of these categories, which come with different costs, rewards, and other features. 

Whether you are going to have your first credit card or you are applying for an additional one - your next card should be tailored to your needs and not just the one you are being offered. 

This post will discuss the 6 most important factors you need to consider when applying for a credit card.

1. Credit Card Purpose 

First thing to ask yourself is “why do I need a credit card in the first place?” 

Are you just starting out and want to build a credit history? Do you shop frequently and want to earn those lucrative reward points? Do you galavant to the airports often and want luxury lounge access? Are you starting a business and need flexible in your spending?

For instance, premium credit cards come with best-in-class benefits like dining credit, airport lounge access, and travel insurance. However, they are most likely to charge a hefty joining fee and annual fee. But if you are looking for those 5X membership rewards or hefty welcome bonuses, you need a premium credit card.

And then there are student credit cards, which are designed for students who have little or no credit history and therefore have lower credit limits–and higher interest rates!

A secure credit card is another type of credit card suitable for people with no credit history. They are backed by cash deposits which lowers default risk, and are a great way to build your credit. 

A travel credit card can be a great choice for you if you are a frequent traveler because of its travel benefits like air miles and discounts on hotel bookings. 

Or maybe you need multiple cards for different purposes–but we would caution you to do this slowly over time, and limit them to 3 or 4.  

2. Credit Score Requirements 

Your credit score reflects your repayment capacity or trustworthiness to pay your bills. So, from an issuer’s perspective, your credit score is the most important factor in evaluating an application. 

Most premium and luxury credit cards like American Express® Gold Card or its Business Platinum Card® require excellent credit ratings (800 and above). 

If you have a bad credit history, credit card issuers may offer you a secured credit card for which you have to make a cash deposit first. (And that’s okay!!)

So, before applying for a credit card, know the credit score requirements so that you have a better chance of approval. You don’t want to try to game the system by applying for multiple cards at one time because it is considered a hard credit inquiry and can hurt your credit. 

3. What is the Annual Percentage Rate (APR)?

APR is the interest rate you are charged on unpaid credit card balances. We would argue this is the most important factor YOU need to look at while shopping for a credit card. 

Remember that a credit card is one of the costliest ways to borrow money.

According to LendingTree, the current average credit card interest rate as of May 2024 is 24.72% (for personal loans, the average is way down - 12.22%).  

This wouldn’t be a factor if consumers paid their balances in full every month, but almost half of all consumers carry their balances forward. So, having a card with a lower APR can save you thousands of dollars over the years. 

While 24.72% is the average APR, it can be as low as 12-13% and as high as above 30%. So, spend some time looking for a card offering a lower APR. *Make sure you carefully read and understand the fine print, which is typically where they disclose this percentage.

4. Credit limit 

A credit limit is the maximum amount of credit available on a card. It can range from $300 to $100,000 depending on your age, income, credit history, and other factors. 

While a high credit limit gives you more spending power (on the negative side: higher debt accumulation), you also need a higher credit score to be eligible. Why? Well, basically they want assurance you’ll pay them back, and a credit score tells them the likelihood of this. You'll see below that as credit scores rise, so follows the credit card limit. 

Pick a card based on your usage. If you use your card for all expenses - from paying for groceries to utility bills and dining out - cards with higher credit limits will suit you. Remember though to keep your credit utilization under 30%, so if you have to get multiple cards to do this, so be it, but keep it to 3 or 4.

For beginners looking to build a credit history, don’t worry as much about a lower credit limit – paying off a small balance every month will still build your credit. It’s not the amount that matters as much, it’s whether you pay it off in full, and on time every month. 

Remember that as you use your card responsibly, keep your credit utilization low, and make timely payments, you are likely to get a higher limit in the future. 

5. Fees and Charges 

In addition to the APR, there are several other costs associated with a credit card. 

These include a joining fee, an annual fee, a cash advance fee, a fee on foreign currency transactions, a late payment fee, and an overdraft fee. 

While premium cards have a higher joining fee or annual fee, there are plenty of credit cards with zero joining or annual maintenance cost (for example: Citi Rewards+® Card and Chase Freedom Unlimited®). 

Having a card with a low or zero fee will help you lower your overall costs of using a credit card. 

6. Rewards & Benefits 

One of the reasons many prefer using credit cards for everything is the reward points or cashback offered by most credit cards. 

Rewards like cashback, points, and gifts are specifically designed to reward users for every dollar spent - and many companies will happily give these bonuses away to keep you using their cards over other competitors. These benefits typically range from 1-5% of the total spent. And if you use these cards enough, the rewards might outweigh any annual fees attached – but do the math beforehand!

Co-branded credit cards (for example Amazon Business Prime American Express Card) offer special benefits on purchases with a particular shopping site or Airline.

You can choose a credit card based on your purchase habits to maximize your rewards and benefits. For example, if you are a frequent flyer, getting a co-branded card with an Airline - for instance, Delta SkyMiles Platinum American Express Card -  can be beneficial for you. 

Since credit cards are an indispensable part of your finances, choosing one that suits your needs is going to be rewarding in the long run. Smart financial education is all about making informed decisions. Remember that every dollar counts! Enroll in our comprehensive 6-module course on practical financial strategies to gain financial freedom.