How To Climb The Credit Card Ladder [2024 Guide] | NerdWallet

Credit cards offer convenience, consumer protections, and a quick way to build credit, but that's only if you use them responsibly. If you use them unwisely, then your credit can suffer, which affects your ability to borrow money in the future. Understanding how credit cards work and actually using them wisely can lead to enormous benefits. For better or for worse, having high credit scores can make your life easier and cheaper. The higher your scores are, the more likely you are to qualify for loans, like a mortgage or car loan, with better terms and lower interest rates. Even if you never plan to buy a home or finance a car, good or excellent credit can still open other doors. Sometimes landlords check your credit when you apply to rent a home, and sometimes employers check when you apply for a job. A good credit score may also allow you to get a cell phone plan or access to utilities without having to make an initial deposit. And if you ever desire another credit card with robust rewards, then good to excellent credit will help pave the way. All those people flying first class for free? Many of them did it through credit card points or miles. If you don't have a high credit score today, you can build your credit score to get there eventually. And one of the best ways to start building your credit is with a great introductory or beginner credit card. What's encouraging is you don't necessarily need to have a high income to have high credit. Rather than worrying about how much money you spend on a card, worry about paying your bills on time and ideally in full to avoid interest payments. So with that, let me tell you how you can climb the credit card tier list so you can go from beginner to boss. Now, if you're new to credit, like maybe you're young and you're just out of school, or perhaps you're a recent immigrant to the U.S., or maybe you're just an adult who's never had a credit card before, you're considered what's called credit invisible. Banks have no idea whether you're trustworthy or not simply because you've never had that chance to actually prove yourself. So in this first foundational tier, you need to do exactly that, and that's proving yourself. Here in this tier, the focus is on building a positive credit history through displaying good credit habits like on-time payments. Now, two options dominate this tier. The first are student credit cards. These are designed for students. They often have lower credit limits, but they can still help build credit. Now, if you're not a student, you may have a harder time getting approved for one of these cards, especially for credit invisible adults who are past student age. You might actually be better off with another class of cards in this tier, which are called secured cards. With secured cards, you put down a deposit, which is usually your credit limit, as some sort of collateral. This just guarantees you're able to pay off your outstanding balance. Banks then return this deposit when you close the account in good standing, or if you get upgraded to a better non-secured card. I'm not going to go super in the weeds of how secured cards work, as we have other videos on those in our channel, but just know for now it's a great way to establish responsible credit use. So once you're out of that tier, what are those better non-secured cards? If you have some credit history, you're in what I consider a beginner tier. And in this tier, you may be eligible to explore cards with slightly higher credit limits, and some of which even offer basic rewards. In this tier, I recommend prioritizing cards with no annual fee. That way, you can focus on building your credit without extra charges. There are though some other features you might want to look for even in this tier. For example, if you travel often, look out for a card with no foreign transaction fees. In this tier, of course, don't expect the rewards and benefits to be amazing. Generally, you're looking at cash back cards that won't earn much more than about 1.5% back, and don't expect other generous offers in this tier either, like 0% interest or balance transfer offers. You're still getting started building up credit, so keep it simple. If your goal is building credit, don't spend more than you can afford, and pay off your bills on time every month. But with a solid credit history, you can move to the mid-tier, and this is where things get interesting. With a solid credit history, you'll have access to cards with higher cash back rates. This could be something like 3% back on groceries or 5% on gas. These cards reward you for your everyday spending habits. Now, some might offer travel rewards, including points or miles in exchange for spending that are redeemable for flights, hotels, and travel experiences. Okay, so now here's what you're thinking, cash back or travel rewards. This depends on both your lifestyle and how much work you want to put into maximizing rewards. If you love to travel, then travel rewards might be the way to go, but not always. Even for frequent travelers, travel rewards can be finicky to redeem, like they might only be redeemable at certain travel brands, which can be really limiting. People who like to keep it simple might be better with cash back. Now, I have another video where I deep dive into cash back versus travel rewards, so I'm going to stop on this point and just recommend that you check out that video. But before I do, I do want to call out credit cards with the rotating categories. These offer bonus cash back or points on specific categories throughout the year, which typically change every quarter. This quarter might be 5% back on gas and 1% on everything else, and next quarter might be 5% on gyms and 1% on everything else, including now gas. These cards can sometimes be valuable, particularly if your road trip aligns with the quarter where gas gets bonus points, but they may not actually pay off if your spending never aligns with the rotating categories. One case where these cards work really well is if you hold multiple cards in your wallet. While it is a myth that holding multiple cards is bad for your credit scores, holding multiple cards is not for everyone, especially if you're managing just one card. But if you really want to maximize the credit card game, then these cards can absolutely make sense. Only use that card at gas stations at the quarter where it gets bonus points, and then use another card at gas stations the rest of the year. Okay, so speaking of multiple credit cards, to maximize rewards, let's talk about the final premium tier. Premium credit cards typically require good to excellent credit to get approved for, and even an excellent credit score is not necessarily a guarantee of approval. Luxury rewards cards often entail benefits like lounge access and airports, travel credits, and even less sexy benefits that can still be super valuable like purchase protection, cell phone protection, and trip cancellation insurance. These cards often have high annual fees, but the perks can be incredible. I've reviewed many of these cards extensively already in other videos, so check those out. That said, it's okay if you never end up in this premium tier. You could have an excellent credit score and be okay just getting a middle tier rewards card. These cards are generally easier to manage than premium rewards cards, which really are only valuable if you use the benefits. And sure, the benefits are good, like room upgrades, but a room upgrade only materializes if you book a hotel room to begin with. Non-travelers just generally don't benefit much from premium credit cards, in which case that medium tier is a-okay. So at this point, you're like, okay, how do I move up between these tiers? There's no set time period, as scores vary based on all sorts of factors that can be unique to you, so visit nerdwallet.com to check your free credit report. You can even get your credit score, which is updated weekly. Generally speaking, though, there are some golden rules to improving your credit scores. Number one, never spend more than you can afford to repay in full each month, as credit card debt can quickly spiral out of control. Then always pay your bills on time. Late payments can not only damage your credit score, but they can also incur hefty fees for you. Then don't apply for too many cards at once, as multiple inquiries in a short window of time can hurt your scores. And finally, understand card benefits before applying. You don't want to be lured by a flashy offer that you don't actually use. And even after reaching the top tier, responsible credit card use is crucial. It's still best practice to maintain a low credit utilization ratio, which is the amount of credit you're using compared to your total limit. Aim for below 30%, and still monitor your credit report regularly. Finally, if you've made it all the way to the premium tier, don't forget that beginner tier card. It might make sense to still keep it open, even if you barely use it for anything more than maybe a recurring music streaming subscription. A long credit history with responsible use is also a key component of your credit scores, which means that first credit card might actually still be the most powerful card in your wallet. So you made it through today's video, but just know you might not necessarily get to that premium card tier for a few years, depending on where you're starting. And as you continue to climb the list, keep up with this channel for more credit card tips like this. To do that, please give it a like and subscribe.