Applying for a Credit Card?
First, you should determine whether you have a legitimate need for additional credit. If you are certain that opening a new credit card account is necessary, make sure you comparison shop to find the card best suited to your individual financial needs.
Ask yourself “Why?”
Before you apply for a new credit card, ask yourself why you need a new card. You need to consider your motivation for seeking additional credit. Credit cards wield considerable financial power, which can lead to disastrous results if used improperly. Will your new card improve your finances, or will it drag you deeper into a debt?
Here are some appropriate reasons for applying for a credit card:
- Building credit. If you are just starting out in life, you should apply for a credit card to build credit. However, don’t go overboard. Credit experts agree that only one or two cards are necessary to build an excellent credit history. There is no reason to have more than three credit cards. Having too many cards can actually hurt your credit score.
- Consolidating your debt at a lower interest rate. If you are already in debt, this is the only reason you should ever apply for another credit card. Only apply for a credit card when in debt if you plan to transfer high interest rate balances to your new card. Otherwise, the extra borrowing power will entice you fall farther into debt.
- Earning rewards. If you have your debt and spending under control, consider opening a rewards credit card to earn rebates, airline miles and other perks based on purchases you already make. If you’re already spending the money, why not earn some rewards? I personally like the American Express Blue Cash card, which provides great cash rebates. Just don’t let the rebates tempt you to spend more than you would otherwise.
- Grace period float. By charging all your expenses and paying them off at the end of the billing cycle, you card’s grace period allows you to “float” your expenses interest-free. This allows you to earn interest on your money in a savings account until your credit card payment is due. The interest you earn won’t be much, but every little bit counts.
Notice that all the reasons I list as “appropriate” all utilize credit in some way to improve your finances. Avoid applying for new credit if you plan to utilize your new credit in a way that costs you money. If you simply want a bigger credit line, why not just ask your current credit card company to raise your limit?
Many card issuers market zero interest introductory APRs on purchases. Zero percent offers can be viewed like an extended grace period. While I advocate taking advantage of grace period float, remember that zero percent interest is not necessarily a good reason to apply for new credit. Each time you apply for credit, a credit check inquiry appears on your credit record. Too many credit inquiries in a short period of time can lower your credit score. The choice to respond to a zero percent offer is yours. Just make sure that you pay off your balance before the introductory rate period expires.
Selecting the right card
Competition among credit issuers is your best friend. Competition leads to lower rates, higher rewards, and terms more favorable to you as a consumer. Take advantage of this by comparison shopping. Don’t limit your options to credit card offers you receive in the mail. Search online for the best credit terms. Virtually all credit cards allow you to apply for an account online.
There is no one-size-fits-all credit card. Credit card issuers market different credit cards to fit all sorts of needs: low balance transfer APR card for people trying to consolidate debt, student cards for students looking to build credit, and rewards cards for people who pay their balance off every month. Each card’s unique strengths invariably lead to tradeoffs in other areas. For example, interest rates are often much higher on rewards cards to pay for the cost of the rewards. If you’re in debt, selecting a card with a low interest rate is far more important than basing your decision on, say, the number of travel miles you’ll earn from your purchases.
Remember that each time you apply for credit, the credit card company appends a notation to your credit file. Other creditors look unfavorably on numerous attempts to apply for credit in a short period of time. Therefore, it is critical that you apply only to one card and to be certain that you qualify. Check your credit record for any inaccuracies that could harm your chances of qualifying for credit, and make sure you understand all the eligibility requirements enumerated by the credit card company. Each time your credit card application is rejected, the more difficulty you will have qualifying for another cards in the near future.
For more information on evaluating credit cards, be sure to read our Credit Card FAQ.
