- How to choose the best credit card: Step-by-step
- When you choose a credit card, consider:
- 2. How will you use the card?
- Need to build credit?
- Need to pay down debt?
- Want to earn rewards?
- Need an emergency card?
- 3. The interest rate
- 4. Credit limit
- 5. Fees and penalties
- 6. Incentives
- Choosing Which Credit Card to Keep
- Why you shouldn’t close your unused credit card accounts
- When should I close an account anyway?
- What to Do If You’re Closing an Account:
- How to Choose Which Credit Card to Keep
How to choose the best credit card: Step-by-step
A credit card is a bit a chain saw — it’s a very handy tool, but it’s capable of inflicting horrendous damage if used improperly. The same advice applies to both of them — choose the right tool for the job, and follow the safety rules.
So when you choose a credit card, here are six things to consider.
When you choose a credit card, consider:
Your credit score will play a big role in determining what kind of card you’ll qualify for. Generally, a score of 700 or higher will allow you to get a rewards card with a sign-up bonus or a promotional interest rate (and a relatively low regular APR).
There are many ways to check your credit score, but not all of them are free. Fortunately, issuers such as Discover and Capital One offer services that allow you to check your score at no cost, even if you’re not a customer. And if you have other credit cards, chances are some of them will include your free FICO score, updated monthly, in your online account.
You can also request a free copy of your credit report at AnnualCreditReport.com. You are entitled to one free report from each of the major credit bureaus — Equifax, Experian and TransUnion — per year. Review your report for any items that may be holding down your score, including errors or high card balances.
2. How will you use the card?
Even before you choose a card, the first question to be answered is how you intend to use it. Are you the kind of person who will pay off the card every month without fail, or do you anticipate carrying a balance from month to month? Are you going to use it to pay for everything, or just for emergencies?
Need to build credit?
Need help?Check out these resources to master the credit card fundamentals.
See more credit card help storiesIf you’re going to pay the bill in full every month, then the interest rate doesn’t really matter to you. Look for the best card with no annual fee and a longer grace period so you don’t get hit with a finance charge. Paying your bill on time and in full is the best way to establish and maintain strong credit.
Need to pay down debt?
If you’re going to carry a balance, you want the lowest possible interest rate or, better yet, a low introductory rate.
Want to earn rewards?
If this is going to be your go-to-card for most of what you buy, look for a card with a generous credit limit and a solid rewards program.
Need an emergency card?
If it’s only going to be used for emergencies, go for a no-frills card with a great low interest rate and low fees.
“There are so many cards that are out there,” says Howard Dvorkin, founder of Fort Lauderdale, Florida-based Consolidated Credit Counseling Services and author of “Credit Hell: How to Get Debt.” “People have to sit down and think about what’s important to them.”
3. The interest rate
Essential reads, delivered weekly
Subscribe to get the week’s most important news in your inbox every week.
On a credit card offer, the interest rate appears as the APR, or annual percentage rate. It can either be a fixed rate or a variable rate that is tied to another financial indicator, most commonly the prime rate. With a fixed-rate card, you know what the interest rate will be from month to month; a card with a variable rate can fluctuate. However, even a card with a fixed interest rate can change certain triggers, such as paying your card — or any card — late, or going over your limit. Or because the credit card issuer decides to change it. Yes, they really can do that; they just have to notify you.
If you’re going to carry a balance, you need to consider how the finance charge is calculated.
The most common method is average daily balance, which means that the daily balances are added together and then divided by the number of days in the billing cycle.
Stay away from credit cards that compute the balance using two billing cycles; this winds up costing you more money in financing fees. There are plenty of cards that don’t.
4. Credit limit
This is the amount of money that the credit card issuer is willing to let you borrow. Depending on your credit history, it could be anything from a few hundred dollars to tens of thousands of dollars.
You don’t want a situation in which you’re close to maxing out your credit limit. It can hurt your credit score — and some credit card issuers have cut customers’ credit limits to an amount that’s lower than their current balance.
Adding insult to injury, there’s a penalty when that happens.
5. Fees and penalties
There’s no shortage of ways for a credit card issuer to make money off you.
Common charges include fees for transactions, such as balance transfers and cash advances, or for asking to increase your credit limit or make a payment by phone.
There also are penalty charges for paying your bill late or going over your credit limit (they don’t decline your card; they just sock you with a fee for it).
Look for cards with reasonable fees. On balance transfers, for instance, look for offers with no transaction fees and 0% interest for at least 12 months. And don’t pay extra for rewards programs. There are plenty of card issuers who don’t charge extra for them.
“This is a crucial issue,” says Eric Tyson, author of “Personal Finance for Dummies.” “You might not intend to carry a balance. But before you agree to accept a card, understand all the terms and conditions because your situation might change … Stay away from ones with exorbitant fees and high late fees, even if the other features seem relatively attractive.”
Many rewards cards offer sign-up bonuses if you meet a certain spending threshold within a few months.
Some even offer additional bonuses if you keep spending at a high level over the ensuing months.
And rewards and cash back bonus categories can boost your savings in the areas in which you routinely spend the most — whether it be groceries, dining at restaurants, streaming services, gas and more.
Look for a program that offers flexibility, such as cash or travel, and rewards you’ll actually use, that are easily earned and redeemed. And find out if your rewards expire, or if there are any limitations on how many points you can earn or must earn in order to redeem them.
Updated: March 25, 2020
The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.
Choosing Which Credit Card to Keep
Many financial experts say one credit card is all any consumer needs. Yes, it’s possible to have multiple credit cards and manage them wisely, but ultimately, the typical consumer should be able to get by with only a single card.
However, if you happen to make a lot of purchases online or travel, you may want one card for that activity and another card as a back-up. The logic being if your account is compromised and it’s closed, you have another card as a backup.
If you have multiple credit cards and you’re wondering which one(s) to keep, you might be thinking you’ll simply cancel all but one of them.
This is actually not recommended; once you’ve got a credit card account open, in most instances, it’s better for your credit score to keep the account open, but to avoid carrying balances from month to month. Closing an account can negatively impact your credit, for reasons we’ll discuss below.
First, consider “keeping” a credit card account means that you’ll keep it active and use it regularly. Other accounts may remain open, but be used infrequently. So while we’re recommending you keep most of your accounts open, the card you “keep” is the one you will actually use.
Why you shouldn’t close your unused credit card accounts
Every credit card account you have open contributes to your credit score in various ways.
Closing the account could ultimately lower your credit score, so instead of closing the account, it’s better if you pay it off or put the card away in a safe and secure location (such as your locking file cabinet at home).
Using that card at least once a year may be necessary so the issuer knows you intend to remain their customer and you won’t find your card closed due to inactivity.
How could your credit score be negatively affected by closing a credit card account? Your credit or what is commonly known as the FICO score is made up of five factors:
- Payment history makes up 35% of your score
- Length of credit history makes up 15% of your score
- How much you owe makes up 30% of your score
- New credit is 10% of your score
- Your credit mix is the final 10% of a score
When you close a credit card account, it will no longer factor into the length of your credit history. If the account is relatively new, you won’t notice an impact, but if the account is one you’ve had for a long time, you will potentially lose a long-standing boost to your “length of credit history” portion of your score.
You’ll also potentially create a problem with your credit mix if you have a lot of non-credit card debts and then you close all of your credit card accounts. Keep your accounts open to maintain a good balance of different types of available credit to boost the “credit mix” portion of the score.
The biggest factor of your score that will be affected if you close a credit card account is your amounts owed. This is also called your “utilization rate” (credit card balance/limit ratio).
The idea is the credit scoring compares the amount of credit you are using compared to the amount you have available to you. If you have 10 credit cards with a total credit limit of $10,000 ($1,000 each), but you only owe $1,000 to one card, your utilization rate is 10%.
This is very good for your credit score, as you have plenty of capacity that you aren’t using.
But if you cancel all but the card with a balance, you now owe $1,000 $1,000 total available, for a utilization rate of 100%. This same balance owed is now hurting your credit score, because you are fully maxed out. Better to keep the unused accounts open to keep your utilization rate low.
While experts advise keeping your credit card utilization below 30 percent, keep in mind that lenders also care about the total dollar amount of your available credit. If you have a low credit limit, it’s not automatically a big problem if your credit card utilization rate is slightly higher than recommended.
We recommend never purchasing more than you can afford and paying your credit card balances in full each month to avoid expensive finance charges. However, don’t expect to pay in full alone on a maxed out credit card to lower your utilization.
The balance reported is the amount owed when you receive your billing statement.
The only way to have a zero balance is to not use the card for an entire billing cycle or pay the balance immediately after your purchase so that your billing reflects a zero balance due.
A final potential factor is a new credit. If you have to apply for new credit cards, those new inquiries affect 10% of your score.
But if you have open credit accounts that you must use, you can request a new card from that lender and start using one of your existing accounts instead of opening a new one.
If you close all of your unused accounts, you have no choice but to apply for new credit when you need it, negatively impacting 10% of your score.
So all together, you have 30-65% of your score that can potentially be impacted by closing unused credit card accounts. The math is clear; don’t close unused accounts. Keep them paid off and open, and your score will benefit.
Your VantageScore (a credit scoring model created by the three major credit bureaus) will be similarly affected, though the percentages are a bit different:
- Payment History 40%
- Age of Credit 21%
- Percent of credit used 20%
- Total balances 11%
- New credit/inquiries 5%
- Available Credit 3%
Regardless of what kind of scores your lenders use, keeping accounts open is usually a better choice.
When should I close an account anyway?
Some situations will lead you to close an account, even if it might cause a hit to your credit score:
- Divorce. If you have a joint account with your spouse and you get divorced, it’s often a good idea to close the account and transfer the balance to separate individual accounts. A judge might rule that one party is responsible for the debt on a particular card, but credit card companies aren’t bound by the judge’s ruling, and they will pursue collection activity against both accountholders. To be sure your credit is protected, you should close joint accounts altogether. Having a joint account get sent to collection will make a difficult situation divorce even more stressful.
- Secured cards. If you don’t have credit, you might have to set up a secured credit card account in order to establish a credit rating. In this case you might have to deposit $500 or $1,000 or more into an account before you can use the account, which is your guarantee for the credit card. This removes the risk for the credit card company, so you gain access to credit. After time, if you prove yourself capable of managing the credit account and build a good credit score, the lender may convert the account to a regular credit account and refund your deposit. If after you’ve had the card and made payments for some time and the credit card holder won’t convert it, you might want to close the account so you get your security deposit back.
- Annual fees. If your card carries an annual fee and you don’t intend to use it again, it’s best to just close it. If you have another account you’re going to use, that will build your credit score so there’s no reason to pay an annual fee just to keep an account you don’t use.
- Debt Management Plans. If you sign up for a DMP with credit.org, we typically direct you to close all of your existing credit card accounts. The DMP is for consumers that have excessive or unmanageable credit balances, a payment plan is established that gets your debts paid off on an accelerated timeline and often at lower interest rates. In order to get the credit card lenders to participate and offer you concessions, and to ensure the DMP succeeds, closing all open accounts is part of the deal. However, for small business owners or those requiring a credit card for work, an exception can sometimes be granted to retain one card for business purposes.
What to Do If You’re Closing an Account:
If you do decide to completely close a credit card account, there are some important steps to take first:
- Make sure the card is not associated with any automatic payments or subscriptions. You don’t want charges coming into the account after you’ve closed it. Make sure you switch all online accounts and subscriptions to your preferred credit card.
- Pay off the card before you close the account. If you owe a balance on an account and you close it, the negative impact on your credit score could be much greater.
- Redeem any rewards available on your account before you close it.
- Keep the account open for a few months after you stop using it before you close the account for good. That way you’ll see any delayed charges, refunds or subscriptions that come in.
- If you’re planning to apply for a loan soon, such as a mortgage or car loan, don’t close the account yet. Pay it off and leave it dormant. After you get approved for your new loan, then you can close the account.
- If you’re closing multiple credit card accounts, don’t close them all at once. Stagger closing the accounts by closing one account per month. This will lessen the impact on your credit scores.
- Make your request in writing to your credit card issuer. Ask that the credit card company report to the credit reporting agencies that your account was “closed by consumer request.” Accounts that are erroneously reported as “closed by creditor” can hurt your credit rating. Request they send you a written reply that the account was closed at your request.
How to Choose Which Credit Card to Keep
Now to the question at hand: which credit card should you keep? Whether you’re canceling your other accounts or leaving them open and storing the cards safely away, you’ll need to choose the best account for you to continue to use.
It’s good to make regular use of your one active credit card account for the sake of your credit score. There are many features of the card to compare:
- Interest rate. For a lot of people, this is the first consideration. They want to keep the card that is the least expensive to use. But ultimately, your goal should be to pay off your card every month and carry no balance from one statement to the next. In this case, you won’t pay any interest, so the rate would not be the most important factor. If you think it will take some time to get everything paid off where you can maintain a zero balance on the card going forward, you could pick a card with the lowest interest rate for budgetary reasons.
- Annual Fee. This is pretty straightforward—if you’re picking between a card with an annual fee vs. one that has no such fee, pick the free one. A card would have to be pretty great in all other respects to justify paying an annual fee when you could simply go with another card that doesn’t charge you just to have the account.
- Rewards. If one card gets you especially good rewards or bonuses for regular use, it might be a good choice. The idea is that you’ll use the card a lot for convenience, but pay it off every month. This builds great credit and avoids any interest charges. The rewards you earn along the way are an extra benefit.
- Discounts. rewards, you might get a discount at a particular retailer for using their card. We never recommend signing up for a credit card just for a discount, but if you already have such an account, you might choose it as your go-to if you shop frequently at that store. We wouldn’t advise keeping a card that you can only use at one store, though. It should be an affinity card with a Visa or MasterCard logo so you can use it at many locations.
- Your oldest account. Because your “length of credit history” is a significant chunk of your credit score, you should definitely keep your oldest account open. If its terms are good, it might be a good one to keep actively using going forward. Some creditors will close unused accounts, and you definitely don’t want to lose this one.
- Debt Management Plans. If you are signing up for DMP and you need to keep one card open for business purposes, your personal financial coach can help you determine which card is the best one to keep.
If you aren’t sure how to proceed with your credit card accounts, call us for a free session. We’ll help you assess all of your debts and come up with a budget you can live with.
We also help with other kinds of debts mortgages, student loans, and more.