Whether you want to travel without carrying cash, handle an unexpected expense, or have a convenient way to make everyday purchases, a credit card can be a useful resource. It can be comforting to know you have another way to pay when you need it. But which credit card is right for you? And what do you need to apply for a credit card?
There are many types of credit cards, with different features, costs, and perks. This article covers some credit card basics, what you may need to apply, and how to find a card that suits your needs.
What card is right for you?
There are quite a few factors to consider when choosing where to apply for a credit card. Start by thinking about what you’re looking for and how you plan to use the card.
If you’re in school, student credit cards are available, and some have no annual fee. A credit builder card may be a smart way to start building credit if you have a limited credit history. If you’re a small business owner, you could look for a business credit card that offers benefits such as business-related perks. One of the most popular types of cards are rewards credit cards. In addition to covering your basic purchasing needs, they may offer rewards like:
- Eligible purchases could earn miles or points that you can redeem for hotel stays, plane tickets, or other travel perks.
- Day-to-day expenses—groceries, gas, and meals—might earn you bonus points on qualifying purchases. For example, a card could offer 2X points on gas or 5X points on groceries.
- Cash back cards could earn you a percentage of eligible purchases back. Some cards offer different rates for different spending categories. Cash rewards may be redeemable for a statement credit, gift card, or deposit into your bank account.
Once you’ve figured out what type of card meets your needs, it’s time to think about the application.
What do I need to apply for a credit card?
Credit card companies offer many types of cards, each with its own credit and financial requirements.
When you apply for a credit card, you’ll typically be asked to provide information such as:
- Annual income
- Employment status
- Current address
- Date of birth
- Monthly housing payment
- Phone number
- Social Security number or other identifying information
The credit card company will use this information, along with other factors, to review your application and decide whether to approve it.
Credit check
One of the most important parts of a credit card application is the credit check. Credit card issuers will typically request your credit report from one or more credit bureaus.
This will generally be a hard inquiry, which is recorded on your credit report and may affect your credit score.
Different credit cards have different credit requirements. An issuer may consider your credit score, credit history, and other factors before making a decision. A stronger credit profile may help you qualify for more credit card options.
If you’re not sure what’s in your credit report, free credit reports are available at annualcreditreport.com. You can also access your credit score and credit report anytime for free through Best Egg Financial Health. Be sure to activate credit alerts too, so you’ll know about certain events that could impact your score.
Income vs. debt
You don’t necessarily need to earn a specific amount of money to qualify for a credit card. Issuers may consider your income along with your existing financial obligations when deciding whether you can make the required payments on a new account.
Your debt-to-income (DTI) ratio is a factor that credit card issuers use to help determine how your current debt compares with your income.
To calculate your DTI ratio, add up your monthly debt payments. This may include your housing payment, loans, credit card payments, and other monthly debt obligations. Then divide that total by your gross monthly income.
For example, say your monthly debt payments are $1,080 and your gross monthly income is $3,600: $1,080 ÷ $3,600 = 30%, so your DTI ratio is 30%.
There isn’t one DTI ratio that determines whether you’ll be approved for a credit card. Credit card issuers use their own requirements and may consider your income, existing financial obligations, credit history, and other factors when reviewing your application.
Knowing your DTI ratio can still help you get a clearer picture of how much of your monthly income already goes toward debt payments before you apply for a credit card.
What if my credit isn’t so great?
You may still have options. Credit cards are available for people with lower credit scores and those with no or limited credit history. Keep in mind that these cards may come with higher fees or interest rates.
A secured credit card could be one option if your credit score isn’t where you’d like it to be. Unlike an unsecured credit card, a secured credit card typically requires a security deposit. If you want a $1,000 credit limit, for example, you may need to deposit $1,000, depending on the card.
If you’re having trouble qualifying for an unsecured card, a secured card may be worth considering. Just be sure to compare the deposit requirements, fees, APR, and other terms before you apply for a credit card.
Remember, even with a secured credit card, you’ll still need to make your regular credit card payments as required. But depending on the issuer and account, responsible use over time may help you build your credit history and credit score.
Choosing the right card
Once you’ve narrowed down your options, read the fine print. A low introductory Annual Percentage Rate (APR) may sound appealing, but what will the standard APR be when the introductory period ends?
The same goes for low-APR balance transfer offers. A promotional rate could help lower your interest costs temporarily, but consider whether you can pay off the transferred balance before that rate expires.
Also look closely at annual fees. If a card advertises no annual fee, check the terms to see whether that applies for as long as you have the card. And if you plan to use the card for cash advances, check the APR for those, too. Cash advances often have a different—and higher—APR than purchases. Additional fees may also apply.
The same thinking applies to rewards cards. Rewards may be less valuable if annual fees or interest charges outweigh the points, miles, or cash back you earn. On the other hand, a card with an annual fee could still make sense if you get enough value from its rewards and benefits.
Before you apply for a credit card, compare the APR, fees, rewards, and other terms. Think about how you’ll actually use the card, not just the benefits advertised upfront.
Taking the next step
The goal is to choose a credit card that works for your needs and your budget. Consider the pros and cons of any credit card before you fill out an application. Review your credit, think about how you plan to use the card, and make sure you understand its rates, fees, and terms.
Taking a little time to prepare before you apply for a credit card could help you make a more informed choice—and feel more confident about your next money move.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
