How to Know When It’s Time to Upgrade From Your ‘Basic’ Credit Card

When you opened your first credit card, chances are you didn’t have a ton of options. Many credit card companies require applicants to have a decent credit score and credit history in order to qualify for a credit card product.

Unsure if your score is decent? Compare your credit score to those in your generation or check your most recent credit score.

As a result, most people begin with a basic starter card. If you’ve been using your starter card for at least six months and have always paid your bill on time, it may be a good time to make an upgrade.

Problems with starter cards

Starter credit cards are pretty basic and often just give you a way to make purchases; they don’t usually offer rewards like cash back or flights. If your first card earns rewards, it likely doesn’t earn them as quickly as some of the more generous programs on the market.

In addition, if you applied for your first card with weak or no credit history, you may have been steered to a secured credit card (a credit card that needs to be backed up with a cash deposit and frequently is associated with high fees). A secured card should be used to help you build up your credit score until you are eligible for a non-secured card.

Finally, starter credit cards tend to have low credit limits because credit card companies don’t want to lend out too much money to new applicants. This means it doesn’t take much to max out your credit card, something that hurts your credit score.

Benefits of upgrading

Upgrading your credit card can help you earn rewards more quickly. If you’re using your credit card often, why not earn as much as possible in rewards? In addition, if you’re carrying an existing balance on your starter credit card, you may be able to transfer it to your new card and save money.

Many cards offer an introductory 0% APR for a year or more which means you don’t owe any interest on your purchases during this time. You can then put those savings towards paying off your balances.

Finally, opening a new card on top of your starter card can improve your credit utilization. Part of your credit score comes from the ratio of your outstanding credit card debt to your credit limit, and the lower, the better. By opening a new card and not using it, your credit utilization rate will improve because your overall credit limit will increase.

For example, you have $2,500 in debt on your starter card with a credit limit of $5,000. Your utilization rate is 50% which is a little high (2,500/5,000). If you add another card with a credit limit of $5,000 while keeping your debt the same, you lower your utilization rate to a respectable 25% (2,500/10,000).

When you can upgrade

You should own your starter credit card for at least 6 months before you can consider applying for an upgrade. It takes at least this long to build the credit history needed to qualify for something better. You should have made all your minimum payments on time, and your utilization rate should be as low as possible. If you’ve missed payments or are close to maxing out your starter card, it will be more difficult to qualify for an upgrade.

Before you apply, you should check your credit score. Your score should be at least over 600 before you apply and the higher the better. The top reward credit cards typically require a credit score of over 700. If your score isn’t as high as it could be, take a few months to keep making your monthly payments and paying down your balances so you can qualify in the future.

Do’s and don’ts of upgrading

DO use your new card to improve your utilization rate – Adding a new card will automatically improve your utilization rate as long as you don’t add to your debt.

DON’T use your new card to take on more debt – If you’re worried that you’ll be tempted to spend more because of your new card, you may be better off staying put. Adding more credit card debt will only put you in a deeper financial hole.

DO look for an upgrade that earns more rewards – A new card can help you earn flights, hotel stays, cash back, merchandise, and other perks for your purchases. Something your starter card is not doing effectively.

DON’T sign up for just any reward program – For rewards to be worth anything, you have to actually want and use them. For example, if you don’t fly often, don’t take out an air miles reward program.

DO apply when you have a higher credit score – A higher credit score will help you qualify for better programs and a lower APR on your new credit card.

DON’T apply right before other loan applications – Every time you apply for a new credit card or loan, your credit score drops by a small amount. When you’re applying for a mortgage or car loan, you want your score to be as high as possible so you can qualify for the best rates. Wait to upgrade your credit card until after you’ve settled your new loan.

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Published December 18, 2015
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