How to Apply for a Credit Card and Handle It Responsibly
Applying isn't hard, but handling new credit can be trickier
Having a credit card gives you a certain amount of financial freedom. You can make emergency purchases in a cash crunch, or spread out the payments on big-ticket charges. But you should clearly understand the risks associated with credit cards. It's surprisingly easy to run up balances on your cards without realizing it and fall into a credit card trap.
Choose the Right Card
First, choose the right credit card. You might receive a lot of offers in the mail, but this doesn't necessarily mean they're a good fit for you.
- Read the fine print and look past the introductory rate to see what you'll be paying after that time period has passed. A rate of around 15% is typical. Go to your current bank to see if they offer a card with a competitive interest rate.
- Consider what you'll be using the card for. Will you confine your charges to small purchases, such as gasoline, and paying the balance off monthly? The interest rate matters somewhat less in this case because you might not be charged interest at all—most lenders have grace periods for paying off your balance at the end of the month before interest kicks in.
- A secured credit card might be your answer if you have poor or no credit. This involves placing a deposit with the lender with the understanding that the lender can keep that money if you default on your card and don't pay the balance you've charged. Your credit limit is typically commensurate with the amount of your deposit, but you can often earn a greater limit over time with a good payment history.
- Look for a card with no annual fee.
- Consider the rewards offered, and how easy they are to cash in on.
Fill Out the Credit Card Application
Fill out an application for the card you want and wait to see if you're approved and at what interest rate. Avoid the temptation to apply for multiple cards at the same time. The bank or lender will do a "hard check" on your credit when you apply, and this will show up on your credit report. It can negatively affect your score if you have too many of these hard checks too close together.
It's not a permanent ding, but you should also avoid applying for one or more credit cards if you know you're going to apply for a mortgage within the next six months or so.
What's a Good Credit Score?
Your credit score is the magic number that indicates to lenders how responsible you are about borrowing and paying what you owe. It's your credit history pared down to three digits.
The interpretation of those digits can vary by lender. Some say a score in the 500 to 600 range is poor, while others draw the line for a poor score at anything below 630. The bottom line is that the higher your score, the better—and the more likely it becomes that you'll be approved for a credit card.
Most experts agree that a good score is well above 700, and some consumers actually have scores of up to 850.
The Importance of Income
Your income can be equally as important as your credit score. You might have a credit score of 750 and still not get a card if you're currently out of work, or you might work but have a low-paying job and excellent credit. In this case, you might get approved for a credit card but it most likely won't have a high credit limit. You might find that you can only borrow a few hundred dollars or so.
Don't forget to include all your sources of income, even if one of them is meager, such as the interest you might earn on a certificate of deposit or other modest investment. Every little bit helps.
Lenders will take both incomes into consideration if you apply for a card jointly with another party. The lender now has two people to pursue for payment in the event of default.
Lenders also look for something called your debt-to-income ratio, a correlation between how much you earn and how much debt you're currently responsible for paying. This is fixable over time by either increasing your earnings or decreasing your debt.
If You're Denied for a Card
You might not be approved for a card if you don't have credit or a job—in fact, you probably won't be. The same applies if you do have a credit history, but it's poor. Try to build or rebuild your credit through other means, then apply again.
Consider an easier card to qualify for. Again, a secured card can go a long way toward repairing your credit because these lenders will report your timely payments to the credit agencies. A store credit card is usually easier to qualify for than a "real" credit card that you can use anywhere, but store card interest rates tend to be much higher. Be sure to pay off your credit card as quickly as possible if you take this route. This, too, will help you build good credit.
You have the right to ask the lender exactly why you were denied. This can give you some insight to figure out what you should fix so you have better luck next time.
Tips for Managing Your New Card
- Try to only use your credit card if you have enough cash available to pay it off that month or if it's a true emergency. Otherwise, you'll risk running up your balance and having your debt get out of hand.
- Your credit card statement will cite a minimum required payment on your statement each month. You must pay at least this amount or you'll be in default, and it's a good idea to pay more than this amount—as much as you possibly can. It can be virtually impossible to pay off a credit card with minimum payments if you keep making charges periodically.
- Avoid having multiple credit cards. This makes it difficult to track your spending and to pay everything off each month. It can also lead to late payments if you forget to pay one.