For better or worse, credit cards are an integral part of our economy. It's estimated that 70% of Americans have at least one credit card, which translates into 174 million users. Given that number, Credit Cards Explained conducted a survey to see what motivates consumers to open new credit cards, and the results were mostly encouraging:
|
Reason for Opening Credit Card |
Percentage of Consumers |
|---|---|
|
Improve credit score or history |
42% |
|
Earn cash back |
23% |
|
Earn travel rewards |
20% |
|
Earn store rewards |
12% |
|
Maxed out a previous card |
8% |
|
Earn a signup bonus |
7% |
DATA SOURCE: CREDIT CARDS EXPLAINED.
If you're thinking of opening a credit card, it's crucial to do so for the right reasons. Otherwise, that card might spell nothing but financial trouble.
IMAGE SOURCE: GETTY IMAGES.
Good reasons to open a credit card
The most popular reason for Americans opening credit cards is a positive one. When used correctly, a new credit card can actually improve your credit score in a number of ways. First, if you make charges on that card but pay your bills on time every month, you'll boost your payment history -- the single most important factor in determining a credit score. You'll also help your credit utilization ratio by increasing your credit limit.
Rewards are another great reason to open a credit card, provided you use that card only to buy things you were already planning on purchasing. Cash back is the most popular reward type because it gives you limitless options. If your credit card company sends you a check for the amount you've accrued in rewards, that money is yours to spend as you see fit. You can use it to pay off debt, contribute to an emergency fund, or meet whatever other needs you have.
Similarly, signup bonuses are a great thing provided they don't tempt you to spend money you weren't planning to spend. But since most of us have basic expenses that can be charged on a credit card, like groceries and gasoline, snagging those bonuses is often quite easy.
And one very bad reason to open a credit card
While most of the aforementioned reasons for opening a credit card make sense, one very bad reason to get a new credit card is if you already have maxed out your other ones. If you're in this position, it's a sign that you shouldn't have a credit card to begin with because you can't be trusted to use it responsibly.
Most people are granted credit limits that are higher than what they should actually be spending based on their income. Therefore, if you've already managed to max out at least one credit card, it's a sign that you're at risk of repeating that mistake. If that's the boat you're in, rather than open a new credit card, you instead should focus on paying down your current one.
Remember, if you max out a credit card and carry that balance for an extended period of time, you'll not only spend extra money on interest, but possibly drive up your credit utilization ratio, which can negatively impact your score. Granted, opening a new card should increase your total line of credit, thus helping that ratio initially, but if you max out that additional card, you'll be back where you started.
Ultimately, it takes a certain type of discipline to have a credit card. If you can't trust yourself not to spend excessively and max out its limit, then you're better off forgoing those rewards and paying for purchases in cash. It's a far better bet than racking up expensive interest charges, ruining your credit, and setting yourself on a disastrous financial path.
