Applying for a credit card is not a decision to take lightly. While credit cards offer convenience, security, and rewards, they can also lead to a life of debt if not used responsibly. Choosing the right credit card for your financial needs is the first step in using credit in a financially responsible way. So when applying for a new credit card, consider these 7 tips.

1. Credit History
2. Card Use
3. Credit Card Type
4. Rewards
5. Introductory Offers
6. Credit Card Issuer
7. Rates & Fees

Credit History

Your credit history and credit score will determine which credit cards you qualify for. Each time you apply for a card, the card issuer pulls and reviews your credit history. Called inquiries, these reviews of your credit history can negatively impact your credit score. So rather than wasting your time and hurting your credit score applying for cards you won’t qualify for, have an understanding of your credit worthiness and apply for an appropriate card.

Credit cards are categorized by credit quality: excellent, good, fair, and bad or poor. While each credit card issuer determines for itself how to categorize credit worthiness, here is how Discover describes various credit ranges:

• Excellent: Pay your bills on time and never miss a payment.
• Good/Fair: Pay most of your bills on time, and have made one or two late payments (more than 30 days past due) in the last year.
• Fair/Bad: Pay your bills, but have made three or more late payments (more than 30 days past due) within the past two years.

You can also check your credit report and FICO credit score to determine where you stand. MyFICO.com, the creator of the official FICO score, offers your report and score for free as part of a free 30-day trial of its Credit Watch program. With your score in hand, you can get a rough idea of how a credit card issuer will view your credit. While each credit card company evaluates credit scores in their own way, according to Equifax, here is a rough idea of what your score means:

• Excellent/Very Good: 725+
• Good: 660 – 724
• Fair/Poor: 560 – 659
• Bad: Below 560

Card Use

It’s really important to understand how you will use the card. For example, if you plan to carry a balance from month to month, a low interest credit card may be the best option. On the other hand, if you plan to pay off the card each month, the interest rate won’t be that important. Instead, you may decided based on the rewards offered by the card.

Credit Card Type

Not all credit cards are the same. In fact, there are four types of cards: credit cards, charge cards, prepaid cards, and secured cards. Each type of card offers different features, which you should understand before applying. Here’s a quick rundown of each type of card.

• Credit Cards: Traditional credit cards are what most people think of when it comes to plastic. These cards come with a credit limit, an APR for purchases, and in many cases cash back or other rewards. The minimum payment each month is usually 2 to 4% of the outstanding balance plus interest. If paid in full each month, however, no interest is charged.
• Charge Cards: With charge cards, no interest is charged because the balance must be paid in full each month. There is usually no preset spending limit, although that does not mean an unlimited credit limit. Instead, the card issuer sets limits based on your credit history and spending patterns. American Express cards are perhaps the best known charge cards available.
• Prepaid Cards: Similar to debit cards, prepaid credit cards allow you to add funds to the card and then use the card just like a credit card. Because you add money to the card before you can use it, there are no interest charges. Spending limits are set based on how much cash you’ve loaded onto the card. Prepaid cards generally do not improve your credit because you aren’t borrowing money.
• Secured Cards: These cards are a hybrid between traditional and prepaid credit cards. Like a prepaid card, you must deposit money with the card issuer. The money, however, is not loaded onto the card. Instead, it is deposited into a bank account and used to secure future payment of the card. The deposit generally pays interest. The credit limit is set based on how much money is on deposit. Like a traditional card, secured cards generally report to the credit bureaus.

Rewards

Credit cards today offer a variety of rewards ranging from cash to discounts to free travel. Rewards generally fall into one of three categories: cash, points, or miles. In many cases, cards that pay rewards in points can be converted to either miles or cash. The key is to understand how you will use the card and what rewards you want.

Some cards offer better rewards for certain categories of purchases. Other cards offer better rewards depending on how much you charge to the card each year. For these reasons, understanding how you will use the card is critical to getting the most out of the credit card rewards. If you fly the same airline frequently, using the airline’s credit card likely will result in accumulating the most miles. The same is often true if you frequently shop at the same retail store.

Introductory Offers

Many cards today offer some very attractive introductory offers. These offers typically fall into one of four categories:

• 0% APR on Balance Transfers: With a balance transfer, you can move high interest credit card debt over to a new card that charges no interest. The 0% APR typically lasts from 6 to 12 months. It’s important to understand the terms of these offers, particularly the transfer fee (typically 3 to 5% of the amount transferred) and the interest rate that will apply when the introductory rate expires.
• 0% APR on Purchases: Unlike a balance transfer, there are no fees associated with using a 0% APR card on purchases. The introductory rate typically lasts 6 to 12 months.
• Cash Bonus: Some cards offer a cash bonus after the first purchase. These bonuses typically range from $25 to $50.
• Miles/Points Bonus: Many cards offer bonuses in the form of miles or points after either the first purchase or after spending a set amount of money. In some cases, the bonuses are based on timely payment over the first 12 or 24 months.

Credit Card Issuer

When you think of credit cards, what probably comes to mine are Visa, MasterCard, American Express and Discover. The question is does it matter what type of card you get? In answering that question for yourself, here are a few things to keep in mind:

• Visa and MasterCard don’t actually issue credit cards. Instead, they serve as an intermediary between the merchant that accepts credit cards and the bank that issued them.
• Discover and American Express act as both the bank and intermediary all in one.
• Visa and MasterCard are the most widely accepted credit cards available. American Express is more widely accepted than Discover.

Fees & Rates

Finally, it’s important to evaluate the rates and fees charged by a credit card. While many credit cards today do not charge an annual fee, some still do. Those cards that do charge annual fees often offer greater rewards or are designed for those with bad credit.

As for interest rates, keep in mind that most cards charge different interest rates for purchases and cash advances. Cards also have a separate interest rate that will apply in the event of default.

Photo Credit: Andres Rueda via Flickr

Whether you are just starting out or you have veered off the path a little, know that the rumor is true – credit cards can be the path to a good credit score. We all know that a credit card is a great way to get into trouble, but, on the flip side, using a credit card can help you establish or improve your credit. This two-edged sword can swing the wrong way if you are not careful.

There are three credit bureaus that figure your scores and they all do it a little differently so your score can vary somewhat between the three. To assure that your score is a good one, let’s look at some of the basics you need to know to achieve a positive credit history.

If you have not yet established credit, don’t worry. Lenders also take other things into consideration, such as your job history and annual income information. But the main thing here is to get started.

Is a bad score really that bad?

You bet! It will cost you thousands in higher interest rates and cause delays in getting approvals. It can mean getting denied altogether. Believe it or not, it can even mean that a prospective employer can turn you down because you appear to be irresponsible or untrustworthy. I still can’t believe that an employer can have access to this information, but the reality is they can.

Now What? Okay, let’s say you’ve been at this a while and have dug yourself in a hole. You have poor credit and you have multiple cards, and just maybe, some or all are maxed out. You are determined to turn things around. What should you do?

1. First, call to see if you are in a position to have your credit limit raised on your cards. It doesn’t cost anything to call (other than the normal frustration of being on hold all day) and you may be successful. This goes back to the debt to credit ratio mentioned earlier. Accomplishing this alone will improve your score. Remember, you are not raising this limit so you can spend more!
2. Next, start paying down your balances. This can be a challenge but very rewarding, and a huge credit booster. There is a way to approach this goal so that you get the maximum benefit. As you pay them off, don’t close them. Just cut up the card. Closing an account has a negative impact on your credit.

Secured Card To The Rescue

If you have been turned down for a traditional credit card you might qualify for a secured credit card. This is a card marketed specifically for individuals with bad or limited credit. Using this type of card will help build and improve your credit score if used wisely.

How does a secured credit card work?
A secured card is basically secured by a “security deposit.” A deposit must be made in an FDIC insured savings account. This “security” deposit assures the card company they won’t lose out if you default. If you do default you will lose your deposit. Here are some things you should know about secured cards:

Unlike most prepaid credit cards, a secured credit card reports automatically to credit bureaus and your good and bad habits will be reflected in your score. Take for instance the Capital One® Secured MasterCard® that reports all 3 of the major credit bureaus. This type of card is ideal for building credit. Depending on the card you choose, your deposit may be placed in an interest-bearing account. No one is getting much in the way of interest these days but what the heck, it’s still worth mention.

Some cards charge an application fee and processing fees. Fees can make a big difference so review them carefully.

Credit Card vs. Secured Card

A traditional credit card can be used to build credit for future purchases, experiences and proof of reliability and trustworthiness. It’s the world we live in. Starting off on the right foot and maintaining the basics of good credit habits will make life a little less stressful – at least in the financial realm.

A secured card is a great way for the person with no credit, limited credit, or bad credit to improve their position. The same basic principles apply in both situations. Whichever route you take, you can build great credit with the proper effort.