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.
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.
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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% 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%.
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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%—and people with poor credit can face an average rate that's as high as 23.48%.* 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.
*These figures are accurate as of publication in September 2013.
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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.
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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.
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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.”
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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% 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% 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.”