Should You Get A Credit Card?

Whether it’s your first or fourth time applying for a credit card, choosing a new card is a decision that will affect your financial situation in some way. Having a credit card can be an asset in terms of building and maintaining a good credit history, but it can also be a gateway to debt, depending on what type of spender you are.

Applying for a credit card is a decision not to be taken lightly. Credit history can’t be erased, so it’s important to analyze your spending habits and financial goals before using a card to build or rebuild your credit.

Also, keep in mind that interest rates on credit cards today are high, in fact over 20 percent. If you do get a credit card, be careful not to carry a balance or engage in irresponsible spending. Accumulating balances can put you in debt, which can ultimately hurt your credit score and financial situation.

If you’re wondering, “Should I get a credit card?”, this guide will help you understand when it’s beneficial to have one and when it’s best not to.

When does it make sense to get a credit card?

Credit cards are a valuable tool for managing your finances. Here are some scenarios when it may be worth applying for a new credit card:

If you want to build or rebuild your credit history

When used responsibly, credit cards can help you build the credit history you need to access financial assistance, says Rasha Katabi, CEO and founder of Brim Financial , “Whether it’s a mortgage, a loan, a business loan, or whatever financial assistance you need to build your business, your life, and your wealth, in the world of credit, having credit is important.”

Without a solid credit history, lenders are likely to view you as a higher risk, which could result in your desired loan or mortgage application being rejected.

If you have limited or no credit, consider a secured credit card. To make up for any shortfalls in credit, lenders ask you to submit an initial deposit, which serves as a benchmark for your line of credit or how much you can borrow. Your payment history may then be reported to the three major credit bureaus (Equifax, Experian, and TransUnion). These types of cards are especially helpful for younger people who are looking to build their credit.

If you want to improve your credit score

Credit cards are one of the easiest ways to improve your FICO credit score. In addition to building a good credit history by making payments on time (which accounts for 35 percent of your FICO score), the following factors can improve your credit score:

• Credit Mix: This refers to the different types of credit products you own and accounts for 10 percent of your FICO score. So, for example, if you already have a car loan or a mortgage, a credit card could be added to your credit mix.
• Credit Utilization: This refers to the amount of credit you’re using compared to your total available credit and accounts for 30 percent of your FICO score.

The generally accepted rule is to keep your credit utilization ratio at around 30 percent, but credit expert, author, and podcast host Beverly Harzog recommends keeping it below 10 percent.

Some issuers, like Discover and Capital One, offer ways to help you transition from a secured card to an unsecured card after six months to a year of responsible use. If you qualify, you can convert both the Discover it® secured credit card and the Capital One Platinum secured credit card to an unsecured card, which could also get you a refund of your security deposit and a higher credit limit.

Remember: Your credit score may temporarily drop right after you apply for a new credit card. This is because the issuer runs a hard credit inquiry and has access to your entire credit report. Your score should recover once you start using your new card responsibly.

If you need help financing a purchase or paying off a debt

A card’s Annual Percentage Rate (APR) refers to the interest you pay on a credit card if you carry a balance over from month to month. Most cards have higher interest rates than something like a personal loan, but some credit cards offer limited-time 0 percent APR periods on purchases or balance transfers. These offers mean you don’t have to pay interest for a set period of time, usually between 12 and 21 months.

If you need extra cash to fund a big purchase or know you’ll need some breathing room to pay off debt, you might want to consider a card with a 0 percent introductory APR offer. With one of these cards, “you’re essentially getting a loan with no interest,” says Harzog.

If you want to get rewarded for spending

You can also save money by using cash-back and travel rewards cards responsibly. Think about how you spend your money and choose a credit card that offers rewards on the items you buy most often. You might want a card that offers simple cash back on basic purchases like gas and groceries. Or, if you travel a lot for work, you might want to earn points or miles with an airline credit card.

“My wife and I have been able to fully pay for several vacations over the past few years just by using our travel rewards card each month,” says Kelan Kline, co-founder of personal finance blog The Savvy Couple. “These are vacations we might not have taken if we hadn’t paid for them with travel rewards.”

You don’t necessarily need a great credit score to qualify for a rewards credit card. Banks and creditors consider a FICO score between 670 and 739 to be a “good” credit score, and this score is enough to get you the best credit cards. With this type of score, you probably won’t get the lowest interest rates or highest credit limits, but if you set a budget and make a plan to pay your bills on time, you could earn rewards that can be used for everything from cash back to travel.

If you want to make your payments more secure

Debit cards are a good choice for people who need help sticking to a budget because funds withdrawn from a debit account are taken directly from your bank account. However, if your debit account is compromised or fraudulent charges are made, the process of recovering funds can be a bit more difficult.

If you report fraudulent debit card use within two business days, under the Electronic Funds Transfer Act (EFTA), you may only be liable for up to $50. If you report it between two and 60 business days, you may be liable for up to $500. If you wait more than 60 days, you may end up paying the full amount of the fraudulent charge.

While we know there are some protections in place, keep in mind that banks and credit unions may require written confirmation of the error and take up to 10 business days to complete an investigation, meaning you could be without funds for almost two weeks.

If you have fraudulent charges on your credit card, you don’t have to go through all this hassle: no money is actually at risk, and credit card issuers usually offer some form of no-liability policy for fraudulent credit card charges.

“If you see a suspicious charge, report it so it can be cleared and you don’t have to pay it,” says Ted Rothman, senior industry analyst at Bankrate.

There are also federal protections against credit card fraud. The Fair Credit Billing Act (FCBA) caps liability for unpaid bills at $50. You have 60 days to report them, but you can’t process your immediate funds during that time.

When does it not make sense to get a credit card?

While getting a new credit card can have a lot of benefits, now may not be the right time to get one. Here are some situations in which it probably doesn’t make sense to get a new card right now:

If you have difficulty controlling your spending

Credit cards are great for making big purchases with a 0 percent APR or to cover emergency expenses in times of emergency. But they’re not great for making purchases that leave you constantly carrying a balance on your credit card. Impulse purchases, in particular, can lead to large balances, and balances that aren’t paid in full can accrue significant interest over time.

If you’re spending more than you can afford on your cards each month and want to increase your purchasing power, a new credit card won’t improve your financial situation, especially considering the high interest rates.

“If you’re thinking about getting a credit card because you want a little bit of extra cash, or you want to borrow against it and you’re looking at it as a form of lending, you should be a little more cautious,” said Colin Walsh, CEO and co-founder of app-based banking service Varo Money.

Harzog agrees, warning potential cardholders to think carefully about their spending habits and how they use their credit cards.

If you recently applied for a large line of credit

You should also avoid applying for a new credit card if you’ve recently applied for or are planning to apply for another major credit card. So if you’re refinancing your home, buying a new car, or taking out a loan, you’ll want to avoid applying for a credit card and the hard queries that will add to your credit score.

Applying for a credit card around the same time as another loan will not only lower your credit score, but it will also make lenders suspicious. “A lender who’s trying to approve your mortgage might look at that and think, ‘Why is this person also applying for a credit card? Does this person think they’ll have financial trouble if they get a mortgage?’ All of these things will be on lenders’ minds,” Herzog says.

If you already have too many cards

Having multiple credit cards can help you minimize your credit utilization ratio. On the other hand, having multiple credit cards can make it difficult to keep track of which card to use for which purchase, not to mention making you more likely to overspend. Determining how many credit cards you should have requires an honest analysis of your budget and goals.

Having multiple credit cards means you have to stay organized to make the most of the rewards you earn and make sure you don’t fall behind on payments. While missing out on a reward isn’t the end of the world, missing a payment or getting into too much debt can have a major impact on your financial situation.

If having too much available credit seems too tempting or too much to keep track of, you should avoid adding another credit card.

It’s also a good idea to avoid applying for multiple cards at once, as this will affect your credit score. “If you don’t plan on applying for any major credit in the near future, say next year, you could get two cards and spread them out over four months,” says Harzog.

Conclusion

Thinking about both the pros and cons of using a credit card can help you understand whether a credit card is something you really need right now.

Opening and managing a credit card requires diligence and an analysis of your assets and spending habits. When opening a credit card account, be sure to spend within your means to avoid carrying a balance. Using credit cards responsibly can help you start building credit and reaching your financial goals.

For those new to credit cards or those with poor credit, secured credit cards can be a good starting point, and if you already have good credit and a good credit score, consider using Bankrate’s card comparison tool to pick out today’s top credit cards.