Key takeaways

 

  • Credit card companies will want to see that you have a good credit history.
  • There are credit card options for people with all types of credit scores.
  • Read the fine print before deciding on a credit card.

Whether you want to travel without having to worry about carrying cash, need help handling unexpected or emergency expenses, or want a convenient way to make everyday purchases, a credit card is a great resource. You know that it’s a comfort to have the resources in your pocket to buy what you need, when you need it. But do you know what credit card may be your best choice and what need to do to apply?

After all, there are many types of credit cards. Depending on different factors and perks, you may favor one type over others. So, which one is good for you, and what’s needed to apply for a credit card? This article covers some credit card basics and explores applying for the one that suits your needs.

———–

With Best Egg Financial Health, you can use our Credit Simulator tool to see the estimated impact of different financial moves – before you make them. Choose from options like a credit limit increase, opening a new account, and more, and our tool will let you know what it could do to your credit score.

What card is right for you?

There are quite a few factors to be considered when choosing a credit card. It depends on what you’re looking for in a card and how you want the card to work for you. One of the more popular choices for people is a rewards card because a rewards card can cover a lot of different needs:

  • If you travel a lot, you might choose a travel rewards card, which could reward your plane, hotel, or car rental purchases with travel miles. Those miles are usually redeemable for other hotel stays, plane tickets, or other perks.
  • If you use your card for day-to-day expenses — groceries, gas, meals — you might choose a card offering points bonuses for qualified purchases, like 2X points for gas, or 5X points on groceries. Points are often redeemed for a statement credit or gift cards.
  • Then there’s the all-around cash-back card, where you may earn a percent of what you spend. Sometimes there are bonuses as well. You might earn 2% back on gas, 3% on meals, and 4% on plane tickets. The cash rewards are usually redeemed for a statement credit, gift card, or a deposit to your bank account.

If you are a small business owner, you could look for a business credit card that’s oriented toward you, offering various benefits from miles rewards to no-limit purchasing. If you’re in school, student credit cards are available, and some have no annual fee. A student credit card or credit builder card is a good way to build credit when you’re just starting out.

Once you’ve figured out what type of card meets your needs, then it’s time to move forward on an application.

What do I need to apply for a credit card?

Credit card companies offer many types of cards, each with their own credit and financial requirements. When applying, you’ll be asked to provide information about yourself, such as annual income, employment status, current address, date of birth, monthly housing payment, phone numbers, and other personal info. After that, it’s up to the credit card company to approve your application. Let’s explore a few things that take place during a credit card application.

Credit check 

The most important step in a credit card application (other than submitting it), is the credit check. Credit card issuers will request your credit report from one or more credit bureaus. This will be a “hard inquiry” — recorded in your credit history as an attempt to obtain credit.

Different credit cards have different credit score requirements, and a credit card issuer will take into account other factors, as well, before making their decisions. But good credit helps when it comes to getting most lines of credit, and excellent credit helps even more. If you’re not sure what’s in your report, free credit reports are available at annualcreditreport.com. As for free credit scores, you can join Best Egg Financial Health and not only have access to your score (and credit report) whenever you need it, but you can also sign up for credit alerts that let you know when events impact your score.

Income vs. debt

It’s not really about having a specific level of income. Instead, it’s about how your income applies to your outstanding debt. Your debt-to-income (DTI) ratio is a factor in card approvals. Add your rent or house payment, all loan and credit card payments, and any other monthly debt payments. Then divide that by your monthly income before taxes. For instance, your debt expenses might come to $1,080 a month, and perhaps your gross monthly income is $3,600. So, we divide 3,600 by 1,080, which is 30%. That’s good because many lenders prefer to see a DTI of 35% or less. If you’re higher than 35% it might affect your card approval or the credit limit a lender grants you.

What if my credit isn’t so great?

Don’t fret, there are still options. Cards are out there for individuals with low credit scores and even for those with no or limited credit history. However, these options might come with higher fees and interest rates.

A secured credit card might be a solution, if your credit score isn’t where it needs to be. Unlike unsecured credit cards, with secured credit cards you deposit a sum of money with the lender — a sort of savings account or security deposit. If you want a $1,000 credit limit, you typically deposit $1,000 with the lender. After making payments on-time for a while, the lender might increase your limit. If you can’t seem to qualify for an unsecured card, a secured card might be your ticket.

Choosing the right card

When deciding what card’s right for you, make sure to read the fine print. A low introductory annual interest rate (APR) is nice, but how high will the standard rate be when the intro rate expires? Same thing applies to low-APR balance transfer offers. They’re great, but will you pay off the credit card balance before the rate jumps? An offer of “no annual fees” might cover only the first year — so make sure they’re not a surprise later on. If you’re planning on using the card for cash advances, check the APR for those — it’ll probably be different (and higher) than your purchase or introductory APR.

And that all equally applies to the rewards cards we discussed above. Rewards aren’t so rewarding if a big annual fee or high interest rate burns up your points, miles, or dollars. Higher annual fees or APRs might still be worth your while, if the rewards you reap outweigh the costs.

Take the next step

It’s good to consider the pros and cons of any card you’re thinking of applying for well in advance of filling out an application. Make sure the card you choose will work for you, so you won’t have to work for it. Then enjoy the purchasing freedom a credit card offers, knowing you’ve made the right choice.