Credit card debt has soared to new heights, totaling over $1.125 trillion at the close of 2023, the highest balance since the New York Fed began tracking in 1999.
In today’s society, credit cards are ubiquitous and play a significant role in our financial transactions. To assist you in managing your credit cards more effectively and harnessing their potential benefits to the fullest, we’ve curated a list of frequently asked questions.
How do you choose the right credit card?
There are several different reasons you may be looking to add a new credit card to your wallet. You may be starting out trying to build credit as a younger person, in which case maybe a student credit card, which is unsecured and easy to qualify for, would be ideal. Alternatively, if you’re in the process of rebuilding your credit after a setback like bankruptcy, a secured credit card could be a suitable option. Others may seek a card for emergency use during lean financial periods. For those with good credit standing, the allure of cashback rewards is often a major draw, offering returns on everyday purchases.
With a plethora of options available, thorough research is crucial to finding the right card for your circumstances. Each credit card differs in terms of benefits, fees, and eligibility criteria, making it essential to understand the terms before committing. Utilizing resources like NerdWallet can provide valuable insights into the cards available, tailored to your current credit score.
How can you determine which cashback card suits your lifestyle best?
Begin by analyzing your spending habits over the past 3-6 months. This assessment will provide insight into where the majority of your expenses lie. Once you have a clear picture of your financial patterns, you can identify which spending categories offer the most potential for cashback rewards.
Among the array of cashback card options, one of the more common choices is a card that racks up travel points. This kind of card would be ideal for frequent travelers, hotel patrons, and users of ride-sharing services like Uber or Lyft. Alternatively, entertainment cards are available as well and cater to those who dine out frequently or enjoy attending shows such as concerts or movies. The third category we see a lot focuses on rewards for everyday essentials such as groceries, gas, and utility payments.
When conducting your research, pay close attention to promotional offers, including any associated annual fees or sign-on bonuses. While high-end cards often feature enticing sign-up bonuses, they may also come with substantial fees that could outweigh the benefits in the long run. It’s crucial to calculate whether the cashback percentage justifies any fees and consider whether paying an annual fee remains viable beyond the initial year of card ownership. Remember, sign-up bonuses are one-time incentives, so evaluate the card’s long-term value proposition beyond the initial perks.
What is a balance transfer, and how can you make the most of promotional offers?
A balance transfer is exactly what it sounds like, a transfer of a credit card balance to another card. Often this type of card is beneficial in lowering your APR and reducing your overall interest payments – a bit like refinancing your debt. Every credit card company is different, but several offer promotional rates as low as 0% APR for a set amount of time, some up to 21 months. What’s the catch? Why wouldn’t everyone take advantage of no interest?
To leverage a balance transfer effectively, you need to follow some essential guidelines. First of all, be conscientious of upfront transfer fees that range anywhere from 3% to 5% of the balance transferred. Secondly, devise a plan to pay off the balance within the promotional period. Failing to pay off the balance before the end of the promotional period could result in higher interest charges than your original card.
If you struggle to meet credit card deadlines, a balance transfer might not be the best option for you. Many offers include clauses stipulating that a missed payment—even by a day—could nullify the promotional APR, triggering a switch to a higher rate. In this scenario, not only do you lose the benefit of the transfer, but you also incur the initial transfer fee on your balance.
Remember to make your monthly minimum payments and avoid making additional purchases on this credit card while paying down your balance. While promotional offers provide a low APR for a limited period, any new charges may accrue interest immediately. Every credit card comes with a “grace period,” mandated by law to be at least 21 days. This period spans from when your billing cycle concludes to the due date. During this grace period, you won’t incur interest on purchases made in the previous billing cycle, but any carried-over balance, including a transfer, could subject new purchases to interest charges.
What impact does my credit score have on applying for credit cards and how can I improve my score?
Your credit score plays a pivotal role in your credit card application process. A higher score not only boosts your approval chances but also widens the array of available options. Fortunately, in today’s digital age, accessing your credit score is easier than ever, with platforms like Credit Karma offering free, hassle-free checks that don’t impact your score. These tools also provide tailored insights and actionable tips to elevate your score, but in a general sense, 6 main factors contribute to your credit score:
Credit Card Use – HIGH Impact
Credit utilization is a simple equation: the amount of credit you’re currently using divided by your total available credit. The lower this ratio, the healthier your credit score.
One effective strategy to reduce your credit utilization is to maximize your available credit. When completing credit applications, consider including all sources of income. For students, this might encompass grants, scholarships, or parental allowances. Similarly, married individuals can leverage their partner’s income to bolster their combined creditworthiness. By expanding your pool of available credit, you can lower your utilization ratio and strengthen your financial standing.
Payment History – HIGH Impact
The more consistently you pay your credit card bills on time and in full, the stronger your score in this category will be. As is life, sometimes there are instances in which payments can’t always be made on time. Just know that missing that payment, even by a day, could have consequences.
A missed payment within a 30-day window typically carries a relatively minor impact on your credit score. However, if you allow a payment to lapse between 60 to 90 days, the repercussions could be more significant and you may find yourself disqualified from applying for specific loans in the future.
Derogatory Marks – HIGH Impact
If you surpass the 90-day mark without making a payment on your credit cards, your account will likely be sent to collections. Failure to take corrective measures at this stage results in receiving a derogatory mark on your credit report, which can significantly harm your credit score. It’s crucial to address missed payments promptly to mitigate the long-term consequences and preserve your financial health.
Credit Age – MEDIUM Impact
When it comes to credit age, early entry into the credit world is advantageous. Unfortunately, this is a factor that can’t be altered retroactively, as it’s determined by the age of your oldest credit card account.
However, if you’re in a favorable credit position, you have the opportunity to pave the way for future generations’ financial success. By adding them as authorized users on your credit accounts, you can positively impact their credit scores without having to grant them direct access to the card itself. As long as you continue to make responsible credit decisions while they’re linked to the account, their credit scores stand to benefit significantly when they eventually venture into the realm of credit cards themselves.
Total Accounts – LOW Impact
Similar to the importance of diversifying your investment portfolio, maintaining diversity in your credit accounts is key. By incorporating various types of credit accounts, such as credit cards or loans, into your financial profile, you enhance your credit mix, which in turn positively influences your credit score. This diversity showcases your ability to manage different types of credit responsibly, thereby bolstering your creditworthiness in the eyes of lenders.
Hard Inquiries – LOW Impact
Hard inquiries are triggered when you apply for credit, this can include everything from opening a credit card to buying a new car or home. Accumulating too many of these inquiries can hurt your score, which is why we recommend minimizing the amount of hard inquires on your account before applying for any large loans such as a mortgage. The good news is that hard inquiries only exert a temporary influence on your credit score and their impact is relatively minor compared to other factors.
Every person’s financial situation is different, meaning their credit card needs vary. Consulting with a seasoned advisor who can craft a personalized and comprehensive financial plan tailored to your specific needs can be instrumental in identifying the ideal credit card solutions for you. Our team is committed to providing expert guidance and support to help you achieve your financial goals with confidence and clarity. If you are interested in connecting with one of our advisors, please contact us at [email protected].
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
