5 Simple Steps for Choosing the Right Credit Card

There are a few things in life where having too many choices is fun. Ice cream comes to mind. Really, Ben & Jerry’s can come out with a new flavor every day and it won’t bother me one bit.

But for the “less fun” things in life, having too many choices is just plain overwhelming and stressful. Credit cards fit into this category. You see ads on TV, hear about them on the radio, see tons of offers on the Internet. You also probably get bombarded with mailed offers for different types of cards: airline miles, low interest, balance transfers, gas rebates and more. Oh, and some will give you a $200 sign-up bonus if you jump through a few hoops within the first three months.

I want you to forget all that. Clear your mind of all the marketing hype because picking the wrong type of card can actually cost you money. Don’t apply for any cards until you’ve taken a little time to go through these five steps to get clarity about what you really need in a credit card.

Step #1: Look at your current financial picture

This is easier than it sounds. You don’t need to consult with a CPA. I’m talking about an honest, straightforward look at your financial life.

• Credit card debt. Are you already in credit card debt? If so, then the only card you need is a balance transfer card. You’ll need excellent credit to qualify for a balance transfer card that offers a zero percent intro APR. If you don’t qualify, then focus on paying down your debt the old-fashioned way. Scrimping, saving and paying more than the minimum. Don’t open a new account until this part of your life is under control again.
• Bill paying habits. Do you tend to revolve debt now and then? Or do you always pay your bill in full every month? If you’re a serial revolver, then rewards cards are not for you because the APRs tend to be higher. The interest expense you’d pay would negate any benefit from the rewards. Sticking with a low-interest card could be your best bet.
• Emergency fund. If you don’t have an emergency savings account, then a low-interest card for emergencies might be in order. If you need a new roof and you can’t pay for it all at once, you’ll want a card that doesn’t destroy your financial future if you carry a balance for six months.

Step #2: Get your FICO score

You can get an idea of what your credit score range is by the offers you receive in the mail. But nothing is a substitute for knowing your current score before applying for a new card. You can get a FICO score for $19.95, or use our Credit Report Card to get an overview of your credit standing for free. Once you have your credit score, you’ll know what credit range you fall within. Then you can focus your search on cards that are targeted to your credit level.

For instance, if your score is between 700-749, you have “good” credit. If your score is at least 750, you’ll probably qualify for the best offers. If your score is less than 640 or so, you might need to take a look at secured cards and work on rebuilding your credit history.

Note: FICO scores and other credit scores do vary from one bureau to the next and they also change almost constantly. But getting a score tells you where you currently stand and gives you an idea of your basic credit level.

Step #3: Look closely at your lifestyle

This step is more important if you decide that a rewards card will work for you. This has to combine your whole life—your personal life and work life. If you’re a stay-at-home spouse, your “work” is running the household and that’s a big job. The goal here is to find out what type of rewards, such as miles or cash back, will save you the most money.

• Leisure activities. What do you (and your family, if applicable) do for fun? Do you enjoy dining out or going to the movies? If so, a cash back or rewards points card that focuses on entertainment might be a good option. If you enjoy cooking, then getting a card that offers savings on groceries might be helpful.
• Vacations. Do you tend to fly or drive to your vacation spots? For people who like to fly to an exotic vacation destination, a card that helps you collect airline miles throughout the year could save you money on airfare. Take this thought process a little further and decide if you’re comfortable earning miles on one specific airline or if you need flexibility.
• Daily activities. Do you drive carpool or have a long commute to work? A card that offers a gas rebate is in order. Or maybe you run your own business and you’re spending a fortune on office supplies. If that’s the case, then you should consider a small business card that offers cash back or rewards points on office supplies.

Step #4: Think about the fees you’re willing to pay (cont.) »

Image: Andres Rueda, via Flickr.com

Step #4: Think about the fees you’re willing to pay

This step is an extension of Step #3. If flying is a part of your life, for instance, then decide if you’re willing to pay an annual fee for a generous rewards program. If so, how high of a fee are you willing to pay? Do you want priority boarding and access to airport lounges?

If you practically live in airports, then cards that offer benefits that enhance your travel experience might appeal to you. Just remember you’ll pay higher annual fees for more privileges. And if you travel overseas, you need to think about getting a card that doesn’t charge foreign transaction fees.

If travel isn’t your priority and you’re just looking for a low-interest credit card, then you might not be willing to pay an annual fee at all. And you might not care that there’s a 3 percent foreign transaction fee.

See where I’m going with this? Just have an idea of what fees you’re willing—and not willing—to pay. When you start comparing cards, you’ll be able to weed out a lot of cards from the start because they don’t meet the criteria you’ve set for fees.

Step #5: Go forth and compare cards

At this point, you have a pretty clear idea of what type of card you need. The next step to the perfect card (perfect for you, that is) is to compare cards within your chosen category.

Don’t just pick a particular cash back card because they sent you a letter plastered with You’ve earned this card! on the envelope. In the past, I’ve fallen for the flattery, too. But now you want the best card you can qualify for that fits in with your financial habits and lifestyle.

So what’s next? Use the custom credit card search feature on Credit.com to put together a list of candidates. Let’s say you want an airline miles card that doesn’t have an annual fee. You can check off these features and even input your credit level. You’ll see a list of cards that meet all of these qualifications.

To review the cards on your list, read the fine print so you can compare APRs, grace periods, annual fees, foreign transaction fees, and so forth. Now you’re on your way to picking a card that’s your perfect match.