11/6/2013 5:00 PM ET|
6 signs you need a new credit card
If you're careful with it, a new credit card can be a great addition to your financial tool belt.
The decision to sign up for a credit card is a lot like purchasing a new car: If you do the right amount of research, shop around and pick the product that best fits your needs (instead of the card that will look the flashiest when you whip it out to pay for dinner), you stand a good chance of enjoying the benefits for years to come.
In the past, we’ve highlighted the six red flag signs that you don't need a new credit card, but this time around, we’re looking at those shiny pieces of plastic in a new light.
The fact is that a new credit card -- when used correctly -- can be a fantastic addition to your financial tool belt. So read on for the six signs that it may be time to consider slipping a new card into your wallet.
You still need to establish proper credit
If you’re just starting to build your credit history, a new credit card can help show future lenders that you’re capable of handling multiple accounts. “I recommend having at least two cards,” says Nancy Anderson, CFP with LearnVest Planning Services. “If you have one card that you’ve already built, maybe add a retail or gas card, and put something on it regularly. Then pay it off every month to help further establish credit.”
Over time, consistent, responsible spending behavior can be rewarded with increased limits and a healthier credit score. “The key for lenders is history,” says Anderson. “They look to see if you’ve made payments on time, as well as your total utilization, which is how much of your credit you're actually using. You shouldn't utilize more than 30 percent of your total available credit at once.” By adding another card, you can increase your total available credit, which should make it easier to spend under 30 percent.
Your current card carries a high interest rate
While we don't recommend carrying a balance on your credit card (paying your bill in full each month is always the best move), we understand that it's sometimes unavoidable. And if your existing card has an exorbitant interest rate, it only adds insult to injury. Anderson notes that, according to CreditCards.com, the average rate on consumer credit is 14.99 percent -- and people with poor credit can face an average rate that's as high as 23.48 percent (as of September 2013). But you can save yourself some serious cash over the long run by adding a lower-interest card, with no annual fee, to your arsenal.
You have a large balance on another card
Although no one signs up for a credit card with the intention of racking up a monstrous bill, the reality is that it can happen ... even to the best of us. By transferring the balance to a low- or no-interest card, you may be able to pay off that debt more efficiently since such cards will typically waive interest payments for a set period of time (usually 15 or 18 months) as a benefit for new users. This can give you a grace period to attack the balance without racking up additional interest charges.
But before you sign on the dotted line, just be sure to read the fine print to see if the card will be a good fit for you after you pay off the balance transfer. Specifically, look for features like low or no annual fees, and an interest rate that's lower than what you have with your existing card.
Your credit score has plateaued
Signing up for one or two cards as a young adult can do wonders for building your credit, but your score should change over time, and if itʼs been hovering around the same number for a few years, it might be smart to sign up for a new card. “Adding an additional card can actually improve your credit—as long as youʼre diligent about making the monthly payments,” says Bryan Zschiesche, a CFP with Financial Synergies Asset Management in Houston. “But donʼt cancel your old card(s), especially if you have always paid on time. The longer youʼve had a card in good standing, the more it will boost your score.”
If you do get a new card, just keep in mind that you may not see an immediate improvement in your credit score. Rather, you'll notice that three-digit number slowly climb if you consistently make payments over the course of several months, and keep your overall credit utilization in check.
You’re disciplined enough to benefit from a rewards card
Airline miles. Hotel vouchers. Cold, hard cash. As long as you stay on top of the balance, and actually redeem your rewards, these perks can be a good reason to choose plastic over paper when paying for everyday purchases. “I have many clients who put everything on a card, and then pay the total balance at the end of each month,” says Zschiesche. “This takes discipline, but the rewards can be significant.”
You’re loyal to a specific brand or store
If your trips to the mall tend to include stops at the same stores, taking advantage of special discounts or credits offered to retail card holders can be a smart decision. “Letʼs say you shop at Nordstrom or Ulta,” says Anderson. “If youʼre already a frequent shopper, you can get store credit, which can be a good thing. You just have to be careful not to overspend because of the credit!” Another word of caution: Since many retail cards charge more than 20 percent interest, Anderson strongly encourages paying off the balance each month, so you don't get suckered into paying high interest on a card that only gives a 5 percent discount.
Additionally, keep in mind that each time a creditor pulls your credit history for an application, it affects your score. For this reason, you'll only want to pursue a card that will likely be approved, and therefore limit the number of people checking your history and dinging your score. “Some cards with maximum benefits are hard to get -- you need a good score for approval,” says Anderson. “So if youʼre concerned about your score, try using Credit Karmaʼs Approval Odds feature when hunting for a new card.”
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Credit cards are essential to building one's credit, especially at a young age. I was 18 when I opened my first one and my credit score at the time was a 670 after having it for about a year. Payments were always on time and gradually my score rose. I am now 25 and my score is 774, so hopefully if ever I need to make a large purchase, I'll be able to receive a sound interest rate. I currently use the South West Card as I travel around often, and their points program is top notch. Just by paying my normal bills and using the card for purchases, I haven't paid for a plane ticket in over 2 years. Credit cards are fine, just don't be irresponsible using them. It's not the banks fault you maxed out and collections are now calling, be a damn grown up.
I use two credit cards. One for tax deductible items and one for personal items. At years end my business card gives me a printout divided up by type of purchase so I can just hand it to my accountant and he can enter totals in the proper area.
I dumped Capital One because of their high interest rates (although I pay off the balance monthly) and went with USAA. I also have an American Express because it is my Costco membership card but I only use it there.
My wife has a dozen cards with zero balances because someone gave her a discount on her first purchase and her credit score is 20 points less than mine.
I have two credit cards .. I carry very little cash .. In these days, you need a credit card to buy food and gas ..
The trick is to pay your credit cards off completely every month .. Get a card that gives cash back such as Discover. Of course you have to be a little conservative in your buying ... Liberals usually would go hog wild with a credit card ...
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