Credit Cards and Credit Scores

Everyone knows that credit cards and credit scores are closely linked. But few have a firm grasp of precisely what those links are.

Every time someone applies for credit, his or her credit score takes a small, usually temporary hit. That's usually fine if the application's approved because a well-maintained account can provide its own score boost to counteract that effect. However, refusals don't offer that opportunity, and multiple ones can drag down scores materially. So it's important not to apply for credit cards for which one stands no chance of being approved.

Cards for Bad Credit

Credit cards are among the fastest ways to build or rebuild credit -- or to destroy it. That means they're a key tool for those whose scores are in the toilet and who are ready to make a fresh start. But act too soon -- before the problems that damaged that score in the first place are fully resolved -- and there's a risk of making things even worse.

Some cards that are designed for people with poor credit are shameless rip-offs that charge extortionate fees for little advantage. Those who find these their only option are usually best advised to stick with prepaid cards, which don't require a credit check, until their score moves up enough to qualify them for a product from a reputable card issuer.

Secured credit cards are a helpful way forward for consumers with poor but not terrible credit: probably a FICO score something over 500. These require an upfront cash deposit, which is normally equal to the credit limit available. When choosing one of these, it's important to make sure the new card company reports the account to all three of the leading credit bureaus. Only then can the plastic boost a score, and, if managed well, see the cardholder soon qualify for an unsecured, mainstream product.

Cards for Fair Credit

Having "fair credit" is often defined as having a FICO score in the 550-639 range. Those near the top of that band may well get approved for attractive cards, some of which offer generous rewards or come without annual fees. At the time of writing, one product is offering two points a dollar on gas, grocery and utility purchases, while another delivers 1.5 percent cash back on all purchases. Those are seriously good deals that compete with rewards offered by cards reserved for those with good or great credit.

People nearer the bottom of the fair-credit score band might still be in secured credit card territory, although it's worth exploring options. One card issuer has a tool, shown here, which allows prospective applicants to discover cards for which they're likely to be eligible without damaging their scores. Another offers a card with a low credit limit that rises automatically once on-time payments have been received for five consecutive months.

Cards for Good Credit

Once an applicant has good (FICO 640-719) credit, the options become much more attractive. Even those near the bottom of the score band are likely to be approved for some great products, including travel cards, which offer miles instead of points or cash back. One might occasionally even find sign-up bonuses, which give cash just for seeing an application approved and meeting a small minimum-spend threshold within the first few months after the account is opened. Annual fees are much rarer on such plastic, and are only charged where a valuable benefit is being offered in return.

Credit cards for good credit tend to deliver generous rewards, including those that offer five percent cash back on categories of shopping that change each quarter. They also often provide great perks, including price and purchase protection, and extended warranties. Introductory zero percent APRs are common, sometimes for both new purchases and balance transfers.

Cards for Excellent Credit

 FICO scores over 720 are likely to find that the credit card world is their oyster. Nearly all cards for those with excellent credit -- with the richest rewards, lowest rates and most valuable perks -- are likely to be available to them. Only truly exotic invitation-only products, such as American Express's Centurion ("Black") card are beyond their reach, and they might be able to get one of those if they meet the dizzyingly high spending requirements and other membership criteria.

Cards for People with No Credit

People with no credit may have a difficult time getting approved for a credit card. However, certain products are designed to help build or rebuilt credit. Prepaid cards and secured cards aren't the same as credit cards, but they may be a good way to build or rebuild your credit so you can apply for a credit card in the future.

Credit Scores Are Key

Scores are central to cards and all other forms of borrowing. They play a huge part in determining the rates one pays on mortgages, home equity loans, auto loans and virtually all other debt -- as well as whether one's approved in the first place.

This means that actively monitoring and managing one is a worthwhile investment of time. And now, with free credit score services, keeping an eye on one needn't cost a dime.

Frequently Asked Questions