If all credit cards came with “let’s pretend this never happened” return policies, perhaps it would be easier to choose one and feel good about the decision. But it’s not that simple. Even canceled credit cards that were paid as agreed can stay on your credit report for up to 10 years. You can’t just try on new plastic and see if it fits.
This may be one reason so many of us feel unsure. When facing major financial decisions, such as picking a credit card, 40% of respondents in a 2015 survey by the National Foundation for Credit Counseling, sponsored by NerdWallet, reported feeling “somewhat confident.” Eight percent reported feeling “not very confident” or “not confident at all.”
How can you know you’re choosing a keeper? Start by asking yourself three questions.
1. What do I spend money on, and is that likely to change?
Different credit cards earn rewards on different purchases. If you frequently cook at home and rarely go out to eat, for instance, you may want to get a card with rewards on groceries instead of restaurants. Don’t make a decision based solely on the sign-up bonus.
Think about the future, too. If you’re anticipating getting a new job, moving, getting married or having kids, consider choosing a credit card that will fit your future spending needs, not just your present ones. Decide if you want to hold on to it for 10 years, one year or somewhere in between.
Maybe there’s a good chance you won’t be fully paying off your purchases for a few months. In that case, a low-interest credit card would make more sense than a rewards card with a higher APR. Or maybe you’re trying to get a job within walking distance of your house, so getting a gas rewards card may be shortsighted. If you want to use your card for a longer period of time, think about getting one with more flexible earnings and rewards that can grow with you.
2. Is this credit card too complicated?
When applying for credit cards, you may fantasize about cracking the code on the world’s most complicated loyalty programs and racking up big points. In practice, though, would you want to devote that much time to your plastic?
If you would, signing up for a card with a more complicated rewards program may be a fine idea. But if it’s unlikely, you may want to look for more flexible earning and redemption options. Here are some key things to watch for when trying to gauge how complicated a rewards program is:
- Loyalty tiers: Some cards are linked to loyalty programs (for example, with an airline or a hotel chain) with different tiers. You can typically advance to a higher loyalty status and earn more benefits by spending more on your card. Before applying for one of these, find out what you need to do to advance. For example, you may have to spend $30,000 on hotel stays at a certain chain before qualifying for an elite status. Think about whether the program would still be worth it if you didn’t get to the next level.
- Redemption options: Find out if you can redeem rewards with only one company (say, the airline that co-branded the card) or several companies.
- Spending caps: Getting 5% on groceries is a competitive deal, but you may earn less than you thought if there’s a $2,000 annual limit on those category rewards. Find out whether the card offers unlimited rewards.
- Rotating rewards: On some cards, the rewards categories rotate every three months. Often, you have to opt into the awards every quarter to receive them. If you feel like this could be difficult to keep up with, you may want a card with categories that don’t change.
- Transfer partners: Find out if the card allows you to transfer rewards to other loyalty programs at a 1:1 ratio, and whether it charges fees for this.
- Blackout dates and availability: Some hotels and airlines won’t let you redeem rewards on peak travel days. Others limit awards seats or rooms. If you have a flexible traveling schedule, this may not matter to you, but if you tend to travel when everyone else does, it could be a roadblock.
Once you have an idea of how difficult it would be to maximize your rewards through a certain program, you’ll have a better idea of whether you should stick with it or go with a more low-maintenance card.
3. How much am I going to spend?
When you apply for a card that promises a sign-up bonus once you spend a set amount (say, $5,000 in three months), think about whether that required spending would be a stretch for you. If it is, consider signing up for a card that makes it easier to nab the sign-up bonus.
Alternatively, you could apply for the card with the higher minimum spending requirement when you expect your expenses to go up — for instance, if you’re planning to shell out a few thousand dollars on a vacation. But don’t make the mistake of purchasing things you don’t need just to meet the minimum spending requirement and earn the sign-up bonus.
If you’re getting a card with an annual fee, make sure you’re going to spend enough on it to make it worth the investment. Say you get a card with a $100 annual fee that earns an unlimited 5 cents cash back per dollar spent on groceries. Sign-up bonus aside, you’d have to spend $2,000 on groceries with that card before breaking even.
If you have a family of five and cook at home frequently, that may be an excellent deal. But if you’re just cooking for yourself, or mostly subsisting on takeout, you’d probably save much more with another card.
So I got the wrong card last time. Now what?
If you picked a bad fit the first time around, canceling may not always be the best solution. As noted, the account will stay on your credit report for up to 10 years even when closed in good standing, lowering the average age of your accounts and possibly bringing down your credit score. The hard inquiry on your report from applying for the credit card may stay on your file for up to two years, as well.
You may not be better off signing up for another credit card right away, either, for the same reasons. Especially if your score is borderline, even a slight change would take it from “good” to “average” and affect your chances of getting the best deals.
If your issuer offers several other credit cards, you may be able to trade in your current card for a different one without hurting your credit. Look at the other options the bank offers and call about the possibility of switching. In some cases, your issuer will just transfer your old account information to the new account, and it won’t affect your average age of accounts; it may not even require a hard credit pull. This type of change could be a good option if you want different earning or redemption options, but want to stay with the same bank. Ask your issuer about how it could affect your credit before making the transition.
If the card you want isn’t offered by your current issuer, though, or if your bank offers limited alternatives, it may be a good time to start fresh after about six months to a year. Compare credit cards through NerdWallet’s comparison tool and read our top recommendations to find a card that’s a good match. Instead of changing your habits to fit a card, change your card to fit your habits.
Image via iStock.