Ask Yourself These Questions Before Opening a Credit Card

 By Greg McKinney Mineola TX

Credit cards can be a great personal finance tool, but they can also make things go incredibly wrong. Knowing how to use a credit card and choosing the right one for the job is important, but not everyone knows how to do it.

 Here’s the truth, though.

 You might not even need a credit card right now. Ads for credit cards are everywhere you look today, making it easy to fall into the trap of needing every shiny new card offered, but they’re not always all they’re cracked up to be.

 Ask yourself these 5 questions before opening a credit card to make sure you’re making the right choice.

 Why do you Want the Credit Card?

 Ask yourself this important question first. Why do you want a credit card? There are many answers, and most are acceptable, except one.

 Here are some common reasons:

·       You want to earn rewards from a rewards card

·       You need a card to book hotels or airfare

·       You want protection for large purchases

·       You’re undertaking a large project, such as home improvement, and need the credit line

 The one reason NOT to open a credit card is just because it’s available. If you’re an impulse buyer and you’ll use your credit card as an extension of your income, don’t open it. Credit cards aren’t meant to be an extension of your income.

 Anything you charge you should be able to pay off in full or have a plan to pay off strategically. For example, if you charge your groceries for the month to get the cashback rewards a card offers, you should pay them off in full before the bill is due or you’ll negate the rewards earned.

 But, if you’re using the card to renovate your home, you might have a longer repayment plan, but as long as you have a plan in place, it’s worth it.

 Where Will you Use it Most?

If you’re opening a credit card for the rewards, think about where you’ll use it the most. Each credit card offers different reward levels for different purchases.

For example, the Chase Freedom Unlimited pays 5% - 6.5% cash back on travel, 3% - 4.5% back on drugstore and grocery purchases, and 1.5% back on all other purchases.

Discover It Cash Back pays 5% back on rotating categories that you choose quarterly, such as grocery stores, dining out, or gas stations.

Find the card that pays the highest rewards where you’ll use it most to get the most cash back. Also, look at how you can use the rewards. Are you looking for statement credits to help you pay down what you charged, or do you want the option to earn miles for travel or money off at the gas pump?

Choose the card that you’ll use the most and that makes the most sense since opening a new credit card will slightly decrease your credit score.

 Do you Have a Lot of Revolving Debt Already?

A part of your credit score is your credit mix. In other words, do you have a lot of revolving debt (credit cards) and no installment debt (personal loans, car loans, etc.)?

If so, it’s hard for lenders to tell how you handle your debts. They need a good mix of credit for a couple of years to see how financially responsible you are. If you already have a lot of revolving debt, opening another credit card could hurt your credit score more than you realize, making any rewards you possibly earn null and void.

Do you Have a Good Credit Score?

If you’re trying to get a rewards credit card, you need a great credit score, usually over 700. If you aren’t sure what your credit score is, you can check with most existing credit card companies or banks. Most offer free access to your credit score.

You can also pull your free credit reports here. Everyone gets free weekly access to all three credit bureaus. Pull your reports and make sure all your payments are on time, you don’t have more than 30% of your credit lines outstanding, and all information on your credit report is accurate.

If you don’t have a great credit score, focus on fixing it first before applying for credit cards. You’ll have a better chance of getting approved for the best rewards credit cards when you have great credit.

Are you Applying for a Mortgage Soon?

If you have plans to buy a house in the next 6 to 12 months, avoid applying for any new credit cards.

You’ll need great credit and solid credit history to get approved for a mortgage. Lenders get weary when you have a relatively new account opened right before you applied for the mortgage.

Hold off on opening any new credit cards until after you close on your home. The temptation to spend will be much higher when you’re under contract for a home and realize all the things you need as you become a homeowner. Don’t let temptation win by not applying for new cards during this time.

Final Thoughts

Should you open that credit card you saw advertised?

It depends on your situation. If you’re looking for a better rewards card or you don’t have a rewards card in your possession, go for it, but only if you’ll use it wisely. Credit cards aren’t meant to help you spend more. They are meant to help you spend wisely and make the most of your personal finances.

If you’re in over your head in debt or you are an avid impulse buyer, skip the credit cards and save your money instead. Only buying things when you have the cash is the best way to keep yourself out of debt and stay on track with your personal financial goals.

Greg McKinney Mineola Texas