In the midst of the COVID-19 pandemic and the ensuing economic fallout, Americans are behaving in a cautious manner where credit is concerned. According to the Federal Reserve, credit card balances plunged in the second quarter of 2020—the largest decline on record—and continued to decline throughout 2020. Despite growth in the second quarter of 2021, balances remained $140 billion lower than at the end of 2019.
Thanks to lower interest rates, many benefits of credit cards could be available at a potentially lower cost. After all, the average credit card interest rate has dropped about 1 point, from 21.30% in February to 20.25% in August 2021. But credit cards may present more risks than perks for those who are unemployed and may struggle to pay off the card. According to the Bureau of Labor Statistics, the unemployment rate spiked to 14.8% in April 2020. By July 2021, the rate had declined to 5.4%—a substantial improvement, but nearly 2 percentage points higher than before the pandemic.
If you’re wondering, “Is now a good time to sign up for a credit card?” the answer largely depends on your financial situation and goals and how a new card could impact your credit in today’s credit environment. The current circumstances could present an opportunity to earn strategic (or necessary) cash back or rewards, or they could worsen a difficult credit situation.
Pros and Cons of Getting a New Card During COVID-19
Build positive credit history
Temptation to spend
Credit score stress
High interest rates
New Card Pros Explained
Credit card rewards can make the most of your everyday spending, whether through ongoing rewards or cash earned from a sign-up bonus. During the first months of the pandemic, 29% of cardholders stretched monthly budgets using rewards for items such as groceries, clothing, and cleaning products, according to a PayPal survey. Some cards and issuers even initiated temporary, COVID-19 related perks, including bonus statement credits and earning rates for groceries, restaurants, streaming services, and food-delivery spending, or cash back for supporting small businesses.
“If using the new account to earn rewards can be done without leading you to spend beyond the limits of your budget, it may make sense if the rewards are something you will use,” said Bruce McClary, vice president of communications for National Foundation for Credit Counseling.
Some credit card issuers provide new cardholders with introductory 0% APR promotions on purchases and balance transfers for a period of time, usually 12 to 18 months. For those struggling financially, a 0% interest rate on new purchases can provide time to cover necessary costs without interest charges. If you’re in relatively good financial shape and paying down high-interest credit card debt, a balance transfer offer could save hundreds of dollars overall.
Build Positive Credit History
Wise credit card use can help you build credit. Whether your credit history has taken a hit because of recent economic circumstances, or you have an unscathed history, a new credit account can help establish a positive credit history if you make regular payments. The account also increases your available credit, which can improve your credit utilization rate—another important factor in your credit score.
New Card Cons Explained
Temptation to Spend
Don’t overspend to earn your sign-up bonus or earn more miles—especially if your budget is tight. “If earning new rewards means charging more than you can afford to repay, it's definitely not worth the risk,” McClary said.
Credit Score Stress
Every time you apply for credit, the lender runs a hard inquiry on your credit report, which can knock a few points off your credit score. A new account reduces the average age of all your credit accounts, which can also have a negative impact on your credit score. Even if your credit utilization rate improves, racking up a large balance would likely have the opposite effect.
Missed payments on your new credit card could also damage your credit score. “Opening a new credit card account when you’re unable to manage your budget and financial obligations can lead to disaster,” McClary said.
High Interest Rates
While credit card interest rates fell in 2020, they were relatively high compared with other forms of credit, such as auto loans, personal loans, and home equity loans. If you don’t pay off your bill in full each month, and there’s no introductory 0% APR promotion, you could rack up a lot of expensive debt.
Card issuers are currently reducing exposure to potentially risky consumer debt, as they did during the last recession. Balance-transfer offers are becoming more scarce, and 0% APR purchase promotions are shortening. So, even if you have excellent credit, it could be difficult to get card approval, the promotional period, or the higher credit limit you’d hoped for.
Should I Apply for Another Credit Card?
Applying for a new credit card during the coronavirus pandemic may or may not be a good thing, depending on your current situation and goals. And remember that just because you apply for a card, it doesn’t necessarily mean that you’ll get it.
Check your credit score to see where it stands, and consider how you might use a new credit card and whether it’s a good fit for your situation right now. If you’ve decided to apply for one, do your due diligence, and review different credit card options to determine which one is the best for you.