What to Consider Before Opening a Credit Card

You're likely constantly inundated with credit card offers. You may even receive several in the mail every single day.

While it can be tempting to sign up for every card that you are offered, you should consider several things before applying for a credit card.

Do your research on the credit card company, as well as a specific card's account features, benefits, and any fees. You also need to be sure that you are financially ready to take on the responsibility of a credit card.

Credit cards can be a powerful financial tool if they are handled correctly. However, many people make mistakes with their credit cards such as overspending and end up with credit card debt, so ask yourself the following before signing on the dotted line.

Why Are You Considering Getting a Credit Card?

In short, there's only one right answer to this—you're considering opening a credit card to build credit. If this is the case, you need to make sure that you act responsibly with your card. You should pay off the balance in full each month, and not use your credit card for things you otherwise can't afford.

This means that you continue to stick to your budget. Remember, it may be easy to put that new pair of shoes on your shiny new credit card, but you will eventually have to pay that money back, plus interest.

Other Tips:

• Limit the number of credit cards that you have.
• If you are getting a new card because another one is maxed out, you should not get the new credit card. Instead set up a budget and work on paying it off. You could try and get a new credit card to access needed benefits not present in the old one, or try to achieve a lower credit card utilization rate within the billing cycle

Look at the Interest Rate

Many cards will lure you with an introductory interest rate, or APR, of 0%. While this may seem like a great deal at the time, be sure that you can pay off your balance during the promotional period. If not, you'll be forced to pay on your card with the new interest rate, which will probably be higher. It may even jump to 25% or more.

Even if a card is offering a promotional rate, be sure to research the interest rate after the promotional period ends. Shop around and look for the lowest interest rate you qualify for. It will save you money in the long run.

Other tips:

• In addition to the introductory rate be sure to look at the APR you'll pay after the promotional period is over.
• The best way to qualify for lower rates is to have a higher credit score, which means you do not utilize too much of your credit and you make your payments on time. 

Look for a Card With No Annual Fee

There are so many credit cards available that you should not pay an annual fee to use your credit card. Many cards try to offer you cash back or other rewards as long as you pay an annual fee with the card. But don't be fooled. There are rewards cards that do not charge an annual fee, so you should keep looking.

Other Tips:

• Do your research and find a card without an annual fee. A good place to start would be with your current bank or credit union.

Consider the Rewards Offered

If you are going to pay the entire balance at the end of every month, you should look carefully at the rewards that you can earn by using your credit card. Generally, the best deals are on the cash back cards. These cards return a percentage of your spending to you. You may be able to cash these rewards in for a higher amount on a gift card.

Travel rewards cards are other good options. These cards can earn you points or miles each month to use toward travel, which can save you money.

Other Tips:

• Take the time to read reviews about the different rewards programs. Sometimes the restrictions on the rewards can make it difficult to use them.
• Only use rewards cards if you plan to pay off your balance in full each month.

Look at the Penalties

You should also research and understand the penalties or fees associated with your card. For example, your credit card company can raise your interest rates for one late payment—and that's in addition to a late fee. Surpassing your card balance will also cause a bump in your interest rate.

Other Tips:

• Understanding how the card works is the best way to make the most of the card without accruing any penalties or additional interest.
• If one card has high penalties, you might be better off choosing another card.

Limit the Number of Cards You Have

Ideally, you should only have one or two credit cards total, including store credit cards. You do not need more than this. It is too easy to find yourself completely overwhelmed with debt if you have more than one credit card.

The safest practice is to have just one credit card that you pay off entirely each month, especially if you are just getting started with using credit cards. If you feel like you need an additional card, consider taking out a prepaid credit card that does not charge a monthly fee or expires.

Other Tips:

• Choose just one or two credit cards that you use. This can stop you from accruing too much credit card debt and help to keep your debt-to-income ratio in check.
• Avoid using store credit cards, which usually have extremely high interest rates.