Credit cards can be an important weapon in your financial arsenal -- when used responsibly. They come with plenty of benefits, including cash back, points and travel rewards. They can also guard you from identity theft and extend protections on your purchases -- and they can help boost your credit score.
We’ll help you decide how to select the right credit card, apply for a credit card and increase your chances of being approved.
How credit cards work
Let’s start with the basics. When you use a credit card, you’re tapping into a line of credit from your credit card provider. You can use your credit card for everyday expenses, but we recommend only charging purchases that you can afford to pay off in full at the end of each month, so you don’t accumulate high interest charges.
Each credit card has a set billing cycle, typically around 30 days. After your billing cycle ends, you’ll have a grace period during which you can pay off your purchases without accruing interest. If you don’t pay the entire balance before the due date, all purchases from the previous billing cycle will begin accruing interest based on your annual percentage rate, or APR. Credit cards are notorious for carrying high APRs, so you’ll want to factor credit card payments into your budget to avoid racking up debt.
Key credit card terms to understand:
As you look into individual credit card offers, you’ll see a handful of common terms that will be helpful to know ahead of time.
- Annual fee: An annual fee is a recurring fee typically charged during the month you originally signed up for the card by the credit card issuer each year.
- APR: An annual percentage rate is the rate at which your credit card balance accrues interest. It’s outlined in the terms of your credit card and is usually based on your creditworthiness.
- Balance transfer: You can transfer a balance from one credit card to another. This usually requires a fee, but there are credit cards without balance transfer fees.
- Cash advance: A withdrawal of cash from your credit card account. It typically requires a high fee to be paid first and is usually not worth it.
- Penalty fees: A punitive fee incurred by missing a payment or having a payment rejected.
- Foreign transaction fees: A fee charged by the credit card for making a transaction that would normally require a different currency than the US dollar.
- Welcome bonus: A one-time bonus earned by new cardholders after spending a certain amount on the card within a specified time frame.
If you’re ready to apply for a credit card, understanding credit scores and the different types of credit cards will also be helpful.
Understanding your credit score
A credit score is a three-digit number that is a numerical representation of a persons negative and positive credit behavior. In other words, it’s a summary of how you manage your debts and can tell a lender how risky it is to lend you money.
When you apply for a credit product -- whether it be a mortgage, credit card or personal loan -- the lender will use a credit report and score to see if you’re considered a good investment. A bad credit score could lead to you being denied, while a good credit score increases your chances of being approved with generous terms. A credit score is essentially a way for lenders to see how responsible you are at managing debt.
There are a number of ways for you to check your credit score. You can utilize free services through certain credit card issuers like Capital One or American Express. You’re also able to request your credit score and report once per year from each of the three major credit bureaus, Equifax, TransUnion and Experian.
Credit score ranges
|FICO score ranges||VantageScore ranges|
|Poor: 300 to 579||Very poor: 300 to 499|
|Fair: 580 to 669||Poor: 500 to 600|
|Good: 670 to 739||Fair: 601 to 660|
|Very good: 740 to 799||Good: 661 to 780|
|Exceptional: 800 to 850||Excellent: 781 to 850|
Find the right card
Before applying for a credit card, be sure to research and find the right one for you. There are different card types to choose from, and it’s essential to know how each one benefits you.
Key things to consider when choosing a credit card
Here are a few things to keep in mind when deciding which credit card you’d like to apply for.
- Does the card have an annual fee? If a credit card carries an annual fee, you’ll want to be sure you have the budget to support it. See if the card’s rewards, with your spending, are enough to cover the fee. Alternatively, some rewards credit cards have no annual fee.
- Should you carry a balance? The easy answer is no, you should always pay off your credit card statement in full each month. That way, you won’t have to worry about interest charges. However, that may not always be feasible. When it’s not, be sure you’re paying more than just the minimum monthly payment to ensure interest charges take as small of a chunk out of your finances as possible.
- Does the card have a good rewards program? A card’s rewards can go a long way toward bolstering your finances. You can earn cash back, travel miles, or reward points on all of your transactions.
- Do you need to transfer a balance? A balance transfer credit card is a great option if you’re looking for a way to pay down high-interest debt.
Look for preapproval offers
Preapproval offers often offer special sign-up bonuses in the form of points, gift cards or cash-back rewards.
Although preapproval offers are targeted, they don’t guarantee approval. Once you apply, a hard inquiry is run on your credit. If a derogatory mark is found that doesn’t fit the lender’s criteria, you could be denied.
Lastly, don’t just apply for a card because you have a better chance of being approved -- make sure it fits your financial goals and offers the rewards you’re looking to earn.
Be prepared for a credit hit
When you apply for a credit card, it typically appears as a hard inquiry on your credit report for two years. If you’re applying for more than one credit account, it is important to be mindful about multiple hard inquiries lowering your score.
A hard inquiry stays on your credit report for two years, but it can only negatively impact your score for up to a year, according to Experian. That is why it’s important to choose which cards to apply for and limit the total number of applications.
That said, a new credit card can negatively impact your score for other reasons. Opening a new credit card reduces your average age of credit, which can lower your credit score.
If used wisely, the positive effects of having a credit card can be long-term. A new credit card increases your total credit limit and reduces your credit utilization, an important factor in determining your score.
Have a repayment strategy
Before applying for a credit card, have a strategy in mind to avoid paying high interest charges since these can completely negate the financial benefits of the card.
The best strategy, of course, is to pay your card off in full on your due date each month. Enrolling in AutoPay is a good way to ensure you pay off your entire balance -- or at least to pay the minimum balance due on time every month. Late payments can also play a big part in lowering a credit score.
What you’ll need to apply for a credit card
To determine if you qualify for a credit card, companies will look at your financial information and decide if you’re a good candidate. They’ll need your:
- Social Security number
- Annual income
Using your Social Security number, the credit card company will run a hard inquiry to determine if your credit report and score qualify you for a card. They’ll also look at your debt-to-income ratio, which is the percentage of your monthly income that goes toward debt. You can calculate your DTI by dividing your monthly debt payments by your monthly pretax salary. The higher your DTI, the lower your chances of qualifying for a card.
Credit card applications are filled out primarily online today, but some companies still allow you to apply via mail or over the phone.
What to do if your application is declined
If your application is denied, the lender is required to provide you with the reasons why under the Equal Credit Opportunity Act. Once you know why, you can work on improving your credit, paying down debt and, when you’re ready, applying for a card that fits your credit profile.
Improve your chances of getting approved for a credit card
If you were denied a credit card or want to ensure that your chances of approval are higher, you should start by reviewing your credit report. Work on any derogatory marks, like late payments or accounts in collections right away. Use features like AutoPay to ensure your credit cards are paid on time every month.
For those with no credit history, consider becoming an authorized user on a responsible friend or family member’s credit card. This can help you quickly build credit so you can apply for your own card. Be cautious of who you choose to team up with. Their credit activity could not only help your score, but hurt it. And vice versa.
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