How to get a credit card: What you need to know to choose and apply
Step 1: Know how credit cards work
Step 2: Find out your credit score
Step 3: What is the best credit card for you
Step 4: How to apply for a credit card
Step 5: What to do if you're denied a credit card
Step 6: Manage your card responsibly
Step 7: Know your rights
Used responsibly, a credit card is a financial tool that can help you establish and build credit, especially if you’re considering financing a home or car loan sometime in the future. Some cards offer perks like travel rewards and cash back, while others are used for a specific purpose like a balance transfer card or a secured credit card for building credit.
Despite the benefits and perks of credit cards, misusing a credit card can hurt your credit and get you stuck in substantial debt. For instance, the average American has $5,525 in credit card debt and $1,887 in retail store credit debt with credit card balances totaling $46 billion.
“A big financial mistake people make revolves around credit cards and charge cards,” Mark Williams, CEO of Brokers International, told Yahoo Finance. “Americans are impulse buyers who overspend, pay the minimum, and do not understand the way interest accrues on credit card debt – which usually has high interest rates.”
Whether you’re considering your first credit card or getting another one, Yahoo Finance’s seven-step guide will help you determine what credit card is best for you, how to manage your credit responsibly, and understand your rights as a credit card holder.
Step 1: Know how credit cards work
A credit card isn’t free money, nor is it a sign of wealth. “It’s someone else’s money and a mini loan,” Williams said.
It’s important to know the different components of a credit card, including the APR, fees, credit limits, sign-on bonuses, and benefits such as rewards, balance transfers, and other perks.
APR
Let’s start with APR.
Essentially, the credit card issuer is giving you a line of credit that you can borrow against with interest, known as the annual percentage rate (APR). If you don’t pay off your balance at the end of the month — called the grace period — interest will be added to the amount you owe. Carrying a balance month-to-month may end up more than the item you purchased with the credit card when you factor in interest charges.
Most credit card APRs are variable and are tied to the prime rate, which tracks the moves of the Federal Reserve’s benchmark short-term rate. Some credit cards can also have a fixed rate, but that’s not nearly as common as variable rates.
The average interest rate on a credit card is 16.65%, but can be much higher if you have bad credit. There are also different APRs. You can be charged a higher APR, called a penalty APR, if you consistently miss your payments. There’s also an APR for balance transfers, when you move an outstanding balance from one card to another. In some cases, this APR can be 0% for an introductory period before resetting. Finally, there’s an APR for cash advances, when you take money from your credit card. Interest typically immediately starts to accrue on cash advances — there’s no grace period.
Check out our guides on APRs, balance transfer cards, and cash advances to learn more.
Fees
Next up: fees.
The first big fee to look out for is the annual fee. An annual fee can be assessed for exclusive credit cards with lucrative rewards or for cards designed for borrowers with poor credit. Sometimes this fee is waived during the first year to entice you to sign up. It’s important to calculate how much in rewards you would typically earn off your regular yearly spending to see if it’s more than the annual fee. Don’t forget to add in perks with monetary value like free checked bags on travel cards in this calculation. If you still don’t come out ahead of the annual fee, maybe the card isn’t worth it.
Other fees to consider: balance transfer fee, if you’re moving balances; late payment fees, if you’re forgetful about payments; foreign transaction fees, if you plan to travel abroad with your card; and wire transfer and cash advance fees.
Interest and fees are outlined in the card’s terms and conditions.
Credit limit
How much you can borrow on your credit card is based on the credit limit the bank offers you. This is determined by a number of factors including the type of card, your credit score, and your income. Those with more income and higher credit scores are offered higher credit limits on their credit cards.
For secured credit cards, the credit limit is usually determined by the amount of the upfront security deposit required to open the card. You can read more about secured credit cards in our guide.
How much of your available credit that you use is an important factor in calculating your credit card. More on that later when we talk about managing your credit card.
Your credit limit is not static. The bank can increase or decrease your limit and will do so depending on how well you manage your credit card and payments and on economic conditions. For instance, banks often reduce credit limits during periods of economic uncertainty. You can also ask your bank to increase your credit limit after you’ve demonstrated a track record of on-time payments.
Sign-on bonus
Many credit cards offer a one-time, sign-up bonus to entice new cardholders. These can range from an additional $200 to extra rewards that could be worth as much as $1,000. While these are certainly attractive, make sure you understand what’s required of you to actually earn the bonus.
That’s right. This isn’t a freebie you get as soon as you get your card. Typically you have to spend a certain amount of money within a specific timeframe to earn the bonus. What’s important is to make sure that the spending you need to do to get the incentive falls well within your normal spending patterns and you can pay off the balance in full. Otherwise, if you start paying interest on any balance you roll over, that dilutes the value of the bonus you got.
Benefits
Finally, it’s important to know about the various benefits of different credit cards that can help you narrow down your choices, such as 0% introductory APR, cash back, or travel rewards.
Other benefits cards may include: Rental car insurance, travel insurance, checked baggage or other travel perks, free credit scores, cell phone protection, and more. While these ancillary benefits are nice to have, they shouldn’t be a major consideration when selecting a credit card.
Step 2: Find out your credit score
As we noted earlier, your credit score is one factor that determines your credit limit on your credit card. It also is a key factor in determining if you actually qualify for the card in the first place.
So, it’s important to know your credit score before you apply because some cards are marketed to those with very good or excellent credit scores. You don’t want to apply for cards that you likely don’t qualify for because when the lender pulls your credit report during the application process, that can lower your credit score.
This is probably a good time to review the difference between your credit report and your credit score.
Your credit report is a record of your personal credit history — your creditors, debts (medical, loans, bankruptcy), and payment history — collected by the three credit bureaus — Experian, TransUnion, and Equifax. The law allows you to get a free copy of your credit report every 12 months at AnnualCreditReport.com.
Your credit score is calculated based on information in your credit report. That’s why it is important to monitor your credit report for any errors as it may negatively impact your credit score.
Lenders will use either a FICO score or a VantageScore to determine your creditworthiness. While these are similar, your FICO score and VantageScore will differ from each other. Your credit scores will also differ among older and newer versions on FICO and VantageScore. But the main tenets of good credit are pretty universal: Pay your debt obligations on time every time; don’t borrow too much or open new accounts too often; and maintain a good mix of credit over time.
Here’s what a good credit score looks like.
Step 3: What is the best credit card for you
The best credit card for you depends on your needs and credit history. Most credit cards are unsecured, meaning they don’t require collateral to open. The main exception is secured credit cards as you’ll see below. Otherwise, most people have unsecured credit cards and if you have good credit, you have options. There are store brands, travel cards, balance transfer cards, rewards cards, and charge cards.
“Every company and specialty store has a credit card and depending on how frequently you shop at a store may determine whether you want that card,” Michael Velazquez, CPA/CFP and senior partner at The Accountancy, LLP, told Yahoo Finance. “If you’re into home repairs then a Lowes or Home Depot card. AMEX is great for business and zero interest cards that offer 18-24 months with 0% are good for balance transfers.”
Let’s break down the different types of cards out there. If you want more information on each type, check out our guides for each kind of credit card.
Balance transfer cards or 0% APR cards
Balance transfer cards are credit cards with introductory offers that can help consumers manage or eliminate credit card debts. Many banks offer 0% APR for purchases and balance transfers lasting from 6 to 18 months. Users can use the introductory period to pay off previous debt or large purchases.
Business credit cards
A business credit card is for business owners and helps to streamline accounting of business expenses to separate from your personal spending, making tax-time easier. Expect higher credit limits and rich rewards on business-related purchases, travel and lucrative cash back offers compared to consumer cards. A business card will also help establish a separate business credit score for growing businesses that may need more substantial financing down the road. But these cards don’t have as many consumer protections as regular credit cards.
Cash back cards
Cash back cards allow you to earn money back on your regular, everyday spending on gas, groceries, restaurants, and other purchases. How much you can earn in each category varies by card, so it’s crucial to match up your spending with the rewards rate. Some cards allow you to choose categories every quarter, but that can require discipline in remembering to register the new spending categories.
Charge cards
Charge cards typically require the user to pay off the balance in full every month, not allowing the credit card holder to carry a balance month-to-month. American Express (AMEX) was initially known as a charge card, but now operates credit cards as well.
Secured credit cards
If you have poor credit, a secured credit card can help rebuild your credit. Be careful of scams. A good place to start is your bank or credit union. If you are trying to establish credit or have poor credit, a secured credit card can help you build credit.
“I recommend a secured credit card for teenagers or those new to credit because it provides a safety net for how much you can spend with a guaranteed limit,” Williams said. “A secured credit card is good to teach financial literacy and has guardrails.”
Student credit cards
Many major banks offer student credit cards for younger borrowers enrolled in school and over certain age limits. These cards aim to introduce young consumers to the world of credit and help them develop credit history early on. They often extend lower credit limits, around $300 to $400, and no annual fees, as this is often a person’s first card.
Store credit cards
Store credit cards can offer perks that help you save money while shopping at a specific retailer or restaurant, while also providing an avenue to build credit for those with less-than-perfect credit if used and managed responsibly. But like all types of revolving credit, these cards can backfire if you can’t pay your bills on time or keep your balances in check, made worse because interest rates on store credit cards are higher than those on regular cards.
Travel rewards cards
If you travel a lot, then you might want a miles card with your favorite airline or one that gives you mileage points. If you travel abroad, many travel cards waive the foreign transaction fee on purchases. Or, you can get a travel rewards card that partners with your favorite hotel chain and earn rewards for free nights. Last, if you don’t have favorites but just love to travel, look into a generic travel rewards card that allows you to earn rewards you can redeem for your travel-related purchases.
Step 4: How to apply for a credit card
Applying for a credit card is a simple, straight-forward process. Most applications are online at the major credit card companies’ websites. You can also sign up at your bank branch or credit union. For store credit cards, you can apply at the register when checking out or online at the retailer’s site.
You may also receive pre-approved or pre-qualified offers in the mail or by email when banks try to get new customers. This means the banks have looked over your credit profile and determined that you would be a good fit for a specific card. However, if you apply for these, you still must go through the regular application process, and if approved, the credit card company must offer you the benefits and terms you got in your pre-approval notice.
While many of these are legitimate offers, be wary of scams and call the bank directly using the number on its website to ask about the solicitation.
The application will ask for your name, Social Security number (SSN), date of birth, income, and driver’s license number or state identification to verify your address.
The application process will also involve pulling a copy of your credit report, so if you have a freeze on your credit report, make sure to unfreeze it before applying. Otherwise, you’ll get denied because the lender can’t complete the application process.
Before applying, always make sure you really need the credit card. The average American has three credit cards and two retail cards.
“A common misstep is to open several credit cards through different retail stores making it difficult to manage your cards and easier to spend too much,” Hannah Szarszewski, CFP and founder of Blue Mountain Financial Planning, told Yahoo Finance. “It’s better to designate one credit card as your primary credit card for spending to stay organized, keep track of your balance, payment due date, and manage your overall spending.”
Step 5: What to do if you're denied
If you’re denied a credit card, the Equal Credit Opportunity Act (ECOA) requires the lender to inform you within 60 days, explaining why you were denied.
If it is based on erroneous information in your credit report, take steps to clear it up by requesting a copy of your credit report and disputing the erroneous information. If you were denied for lack of credit history or poor credit, consider a secured credit card to build credit history or rebuild bad credit with on-time payments.
You can find out more here on steps to take if you’re denied.
Step 6: Manage your credit card responsibly
If you weren’t denied, now you’ve got your credit card. Congratulations! Next up is managing your credit card responsibly so you can get the full benefits without any of the drawbacks. There are three main factors to consider here: on-time payments, minimum payments, and credit utilization. Let’s dive in.
On-time payments
Making on-time payments is the biggest factor contributing to your credit score — 35% of your total score. So, it’s very important to get your credit card bills paid on time. To make it easier, most credit card companies allow you to set up automatic payments from your bank account, so you don’t miss a payment.
If you do miss a payment, you’ll likely incur a late fee, which can be spelled out in the terms and conditions of your credit card. If you miss too many payments in a row, you may be assessed a penalty APR, which is much higher than your regular APR, so your interest charges will balloon. Missed payments also negatively impact your credit score.
Although many companies have a grace period for payments after the due date that won’t count as a late payment on your credit report, grace periods vary by company so be sure to find out if your credit card company has a grace period.
Minimum payments
Sure, it’s enticing to just pay the minimum payment, which is a lot smaller than your total balance and still counts as an on-time payment. But you should really aim to pay your balance in full each month to avoid interest charges. Because interest rates on credit cards can be so high, making minimum payments digs you deeper into debt and you end up paying way more than the price tag on the items you purchased.
“Only making minimum payments can be incredibly detrimental,” Williams said.
Here’s a quick illustration.
Say you charged $1,000 on your credit card that has a 19% APR. The minimum payment is equal to 4% of the balance or $40. If you just make the minimum payment, it will take 72 months — that’s 6 years! — to pay off the balance. With interest, you’ll end up paying $1,515.62 in total, or 51% more than what you initially charged.
If you can’t pay off the entire balance, pay as much as you can to minimize the snowballing of interest charges.
Credit utilization
Another key factor in your credit score is how much of your available credit you actually use — called credit utilization. The lower, the better.
“The rule of thumb that goes in the algorithm for credit score calculations is to have a credit utilization of no more than 30%,” Velazquez said. “But 10% is better.”
Here’s how you figure that out. If your credit limit is $1,000, you should aim to charge no more than 10% to 30% of that limit each month, which equals $100 to $300. If you want to charge more — and can pay it off in full every month — it’s better to spread those charges across several cards to keep the utilization on each in that 10%-to-30% range. You can also request a credit limit increase from your issuer.
Step 8: Know your rights
Several major pieces of legislation provide consumer protections when it comes to credit cards. They include the Fair Credit Reporting Act, the Fair Credit Billing Act, the Fair Debt Collection Practices Act, and the Credit Card Accountability Responsibility and Disclosure Act, or CARD Act, of 2009. Here's a breakdown of your rights.
Changing terms
Your credit card company can change the terms of your credit card agreement. If the change is substantial, your bank must give you 45 days of advanced notice. Changes that require notice may include increases to certain interest rates or fees, an increase to the minimum payment, a change to your grace period, or a change in how interest is calculated.
Other changes to your benefits such as rewards or other perks generally don’t require notice. There are also certain changes that issuers can’t make, like increasing the interest rate for existing balances, except in a few circumstances.
You may have the right to opt out of the new terms and conditions, which may mean the issuer will close your account. You are still responsible for any remaining balance, but don’t have to pay it in full. You can pay it over time like your regular credit card balance.
Disputed charge
You also can dispute charges on your credit card for a variety of reasons under the Fair Credit Billing Act. Examples of disputed charges include:
Charges with the wrong date or amount
Charges for goods or services you didn't accept or weren't delivered as agreed
Math errors
Failure to post returns or refunds
Failure to send bills to your current address
To dispute the charge, write to your credit card company at the address for billing inquiries — not where you send your monthly payments. Make sure your letter includes your name, address, account number, and a description of the error. Send it no later than 60 days after the first statement with the billing error, preferably by certified mail. Your credit card company has 30 days to respond and 90 days to resolve the dispute.
Fraud
If you suspect that someone has used your credit card without your consent, call your credit card company right away to report the suspicious activity. Typically, the credit card company will close your existing card and reissue a new card with a new number. Under federal law, you’re not responsible for more than $50 in unauthorized charges, but most credit card companies limit that liability to $0.
Problems with issuer
If you are experiencing a problem with your credit card issuer, the Consumer Financial Protection Bureau (CFPB) can help you. The CFPB is a government agency that makes sure banks, lenders, and other financial companies treat consumers fairly. You can submit a complaint with the CFPB at www.consumerfinance.gov/complaint/ and the agency will help facilitate a resolution to your complaint.
In a nutshell:
A credit card — if managed properly — can help increase your credit score so you can later qualify for a mortgage, auto loan, or a good insurance premium. A credit card can also give you rewards, travel points, and cash back incentives.
But if you’re not disciplined, credit cards can lead to overspending and massive debt. Late payments, high balances, and maxing out your credit card can increase your APR and lower your credit score, making it harder to get other forms of credit. It’s important to be honest with yourself about your financial situation and behavior before committing to a credit card.
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda
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