Key Considerations When You Apply for a Credit Card
A credit card can be a useful way to build your credit history or to earn rewards on your purchases. But before you apply for a credit card, it’s helpful to do your homework. There are several terms to know â€” and questions to answer â€” before you add a new card to your wallet.
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Terms to Know Before You Apply for a Credit Card
Before you start filling out credit card applications, there are some key terms to know. To save you some time reading through all that fine print, here are some of the most important ones:
- Annual fee: One thing to be aware of is whether a card you’re considering charges an annual fee. This is a yearly fee that you’re charged simply for being a cardmember. According to a 2015 Nerdwallet report, consumers who applied for and were approved for a credit card paid an average annual fee of $65.83.
- Annual Percentage Rate (APR): The annual percentage rate represents the amount of interest you’ll pay over the course of a year if you carry a balance on your card. The higher the APR, the more you’ll pay in interest. Credit cards also can have multiple APRs. You may pay one APR for purchases, another for balance transfers, and still another for cash advances. As of the third quarter of 2016, the average credit card APR was 12.51%.
- Finance charge: This term refers to a fee that you pay for carrying a balance on your credit card. The finance charge includes the interest costs, along with fees you may pay for things like cash advances or balance transfers.
- Fixed vs. variable interest rate: When it comes to your APR, you need to know whether it’s fixed or variable. A fixed rate means the interest rate doesn’t fluctuate as you repay what you owe. A variable rate, on the other hand, can change over time as the underlying index rate it’s tied to increases or decreases.
- Grace period: When you make a purchase with your credit card, interest typically doesn’t start accruing right away. The credit card company offers you a grace period, during which you can pay the balance without interest, from the end of your billing cycle to your next payment due date. There usually is no grace period for cash advances.
- Introductory rate: Some credit cards offer new cardmembers an introductory interest rate for purchases, balance transfers, or both. This rate, which can be as low as 0%, is in effect only for a certain amount of time. Once the introductory rate period ends, you’ll automatically be switched over to the regular APR, which will be higher.
Ready to Apply for a Credit Card? How to Choose the Right One
Credit cards aren’t one-size-fits-all and you don’t want to pick one that’s a mismatch for your spending style. Asking these questions can help you narrow your options:
Am I willing to pay an annual fee?
Annual fee varies for each credit card and by credit card issuer. If you are interested in a credit card with an annual fee, you should consider if you can pay your balance in full on time each month. You’ll also have to do the math to see if the difference in perks/rewards you receive from the annual fee card makes up for having to pay the annual fee. This way, you can weed out cards that are outside of your comfort zone.
Is earning rewards important to me?
Next, think about what your purpose is in applying for a new credit card. If you’re looking to transfer a balance to a lower interest rate card, then earning rewards may be lower on your priority list. The same goes if you’re interested in taking advantage of a 0% introductory APR offer in order to make a large purchase.
If so, what kind of rewards?
If you are a rewards-seeker, you should have an idea of what kind of rewards you’d like to earn and how a particular card’s rewards structure aligns with how you spend. If you’re a frequent traveler, a card that offers airline miles is likely to be more attractive â€” and useful â€” than one that offers cash back on purchases.
Will I pay in full each month or carry a balance?
Finally, think about how much you anticipate charging and how you’ll pay it off. If you’re going to be paying in full each month, it may not matter if the card comes with a higher APR. On the other hand, if you think you’ll carry a balance from time to time, you may be better off scouting out a card with the lowest available APR.
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How’s my credit?
There’s one last thing to bear in mind about choosing a card: the credit check. When you apply for a credit card, the credit card company will review your credit report and credit score to see how financially responsible you are. Taking a peek at your credit before you apply can give you a better idea of how likely you are to be approved for the credit card you’re seeking.