Does that shiny new credit card offer make sense for your personal finances?
Maybe that’s the bottom line right there. If it doesn’t make sense for your current budget, it’s probably a good idea to skip it. While I firmly believe in the responsible use of credit cards over debit cards, there is such a thing as opening the wrong credit line, but let’s unpack this question.
Last week DoorDash, Chase, and Mastercard announced the coming of a DoorDash credit card. It’ll be interesting to see if the credit card gives you more benefits beyond the perks of a DashPass, but no doubt people will jump on the bandwagon without doing their homework.
Let’s walk through some of the considerations you should ponder before taking a hit on your credit score.
What is the APR?
This is without a doubt the most important question you need to ask yourself.
A card’s annual percentage rate (APR) is the card’s annual interest rate. Basically, it’s the price you pay for borrowing money.
Here are some important points to note about a credit card’s APR:
- Credit cards may offer an introductory APR that is lower than the standard APR, sometimes even 0% APR.
- Interest rates are intentionally high, because this is how credit card issuers make money.
- Carrying a balance is not the only way you can pay interest on a card.
- Cash advances, late payments, and returned payments can generate interest rates even higher than your normal rate.
- A credit card’s APR does not include other fees such as annual fees.
The best way to avoid paying interest is to avoid carrying a balance. The rest of this article doesn’t really matter if you are struggling to pay off credit card debt. If you are carrying credit card debt, now is not the time to apply for a new credit card, even if the new card is tempting you with a lucrative introductory balance transfer.
Life happens. If you don’t have an emergency fund to absorb an unexpected blow, consider whether it makes sense to apply for a credit card with an astronomical APR. If you fall behind, that APR could eat you alive.
Are you feeling pressured?
People say it’s never good to grocery shop on an empty stomach. The same logic is true of impromptu credit card applications. If you’re standing at the register at one of your favorite retailers, you might be tempted to lower your final bill by applying for one of their store cards. That store clerk isn’t being sweet to you because they’re into you.
No interest for six months? Sure! That sounds wonderful! And you really like the shirt I’m wearing?
Except, if you’re holding up the line, do you think you’re really going to have time to ask questions like how much the interest rate jumps up after the introductory period?
You can always apply for the credit card later, from the comfort of your own home and in the quiet space of your own schedule.
Fun fact: Store cards are rarely beneficial outside of their own retail space.
What is the welcome bonus?
The quickest way to rack up award points on a credit card is to take advantage of their welcome bonus. Banks know this and find clever ways to use the appeal of that welcome bonus to reel you in.
At the time of this writing, for example, you could apply for the Marriott Brilliant and earn 150,000 Marriott points. Or, you could apply for the Sapphire Reserve (affiliate link) and earn 60,000 Ultimate Award points.
But before you’re tempted, consider the next question.
How much will that welcome bonus cost you?
The Marriott Brilliant card requires you to spend $5,000 in the first three months of card ownership in order to generate the 150,000 Marriott points.
The Chase Sapphire Reserve requires $4,000 in minimum spend during that same period to get 60,000 Ultimate Award points.
Housing is usually your largest monthly expense and is therefore tempting to use as the fastest way to conquer that minimum spend. The problem is, if you’re paying rent, most landlords won’t accept credit cards. You could use a service like Plastiq to put your rent on a credit card, but it will come with a fee, usually something close to 3%. If your hypothetical rent is $2,000, the fees will be $60. That means you’ve just chipped away $60 from the value of your welcome bonus. It’s counterintuitive to eat away at the welcome bonus you’re trying to earn.
The best time to take out a credit card is when you will spend money organically, such as:
- Moving to a new place
- Furnishing your new place
- Remodeling your home
- Making major repairs
- Purchasing a large ticket item such as technology or vehicle
- Reserving a vacation
These are transactions you would have needed to make anyway, hopefully with money you saved, and can help put a dent in that minimum spend without wasting money on fees.
If you’re stretching your budget to make purchases you know you cannot afford just to hit that minimum spend, then you are not practicing responsible financial management. Applying for a credit card may not be in your best interest right now.
I’ve spent as much as two months weighing the pros and cons of applying for a credit card. I know what it was like carrying a balance I could not pay off in college. In fact, I’m embarrassed to admit I once used student loans to get rid of my credit card balance, exchanging one poison for another. Credit cards, if properly managed, can be a smart financial strategy, but you need to stay on top of them in order to make them work for you.
Next week we’ll get into the value of welcome bonuses, the value of award points, annual fees and more. When you step back and think about it, there’s a lot of thought that goes into a credit card application.
I’m looking forward to picking it up from here next Monday! In the meantime, what questions do you have of the material we’ve covered so far?