There’s a reason why 189 million American adults have a credit card: they can make life a lot easier.
Credit cards offer convenience and flexibility because they’re widely accepted and allow you to make purchases without carrying cash. Credit cards essentially act as short-term loans from the credit card company. If your bill is paid in full and on time each month, you can build credit and avoid going into debt.
However, because you have the option to pay only a minimum payment each month, it’s easy to let the unpaid amount roll over into future months, where it can accrue interest and quickly send you deeper into credit card debt. If you’re ready to open a credit card, make sure you’re ready to be disciplined in your payment approach so that you can reap the many benefits of building credit and stay on track to reach your financial goals.
Why open a credit card? First, many cards offer rewards and perks, such as cash back on certain purchases or points toward gift cards, airline miles, or hotels. Good card providers closely monitor your account to protect against fraud by flagging questionable transactions. What’s more, using a credit card responsibly (such as by paying bills on time) is a great way to build up your credit score over time.
With so many cards out there, figuring out which credit card to apply for can be daunting.
With that in mind, let’s take a look at some tips that should help make the credit card application process easier.
1. Check your credit score.
The higher your credit score is, the more likely you’ll be approved for a credit card. If you aren’t sure what your score is, use a site such as Credit Karma to find out for free. The higher your credit score, the greater the chances of approval for a credit card. Your credit score can also impact your borrowing limit and the level of benefits you will receive. If you’re a student, don’t let your limited credit history stop you from looking into a credit card. Many banks offer credit cards designed for students that allow you to build your credit and work toward qualifying for higher-level cards in the future.
2. Take steps to build your credit score.
No matter what your credit score is—or if you’re one of the tens of millions of Americans who doesn’t have a credit score to begin with—you can always take proactive steps to either improve or establish your score.
A credit score is determined by the following components:
- Payment history (35%)
- Credit card utilization rate (30%)
- Length of credit history (15%)
- How many accounts you have (10%)
- Number of inquiries into your credit (10%)
Generally speaking, the longer you have a credit card open, the less you borrow against your limit (e.g., spending $300 against a $5,000 credit limit), and the more often you pay the full amount on time, the higher your credit score will be.
3. Low credit score? Consider a secured credit card.
Having a low credit score, or no score at all, can make it more difficult to open a credit card. However, there is another route to look into: opening a secured credit card.
A secured credit card is backed by cash. For example, the borrower could hypothetically give the bank $1,000 in order to be approved for a secured credit card with a $1,000 limit. As long as the borrower stays in good standing, they’ll get that initial $1,000 deposit back when they close the card.
Secured credit cards provide an opportunity for the holder to demonstrate their dedication to paying their bills each month. Over time, their credit scores grow, which can help them get approved for a traditional credit card in the future.
4. Shop for the right card for you.
With a solid credit score, you can start shopping around to find the credit card that makes the most sense for you. Some cards offer rewards, but many of them also have yearly membership fees. As you look at different options, consider the kinds of benefits that matter most to you and which spending level fits with your financial plan.
5. Apply for one card at a time.
After you’ve zeroed in on your credit card of choice, it’s time to begin the application process. In general, a good rule of thumb is to apply for one credit card at a time. This is because each time you apply, a credit card company will inquire about your credit, which can temporarily have a negative effect on your credit score. If you apply for several cards at once, you may get dinged with several inquiries at the same time, giving the appearance of a lower credit score, which could hurt your chances of approval.
6. Get ready to prove you can repay.
Gather relevant financial documentation (e.g., pay stubs and tax information) before you apply for a card. Some credit card companies may ask for proof of income before making a decision on your application, so having the information on hand can speed up the application process.
7. Read the fine print.
It’s always important to look at the fine print before you sign.
When reading the fine print, look for information on what happens if you miss a payment. Find out the card’s annual percentage rate (APR) to determine how much interest you would accrue in the event that you can’t repay a bill in full on time. See if there are any annual fees attached to the card and whether the card waives any of these fees during the first year. Look for limitations on how quickly you can apply to upgrade to the next tier; some companies require you to have one card for at least 12 months before applying for a higher-level card.
By studying the fine print and asking the important questions, you can avoid being surprised later by a detail that was hidden in the terms and conditions.
Are you ready for your first credit card?
The right credit card can make your life easier in many ways.
With a disciplined spending approach—and a commitment to paying your bills on time each month—you can build a solid credit score, which is important when applying for any kind of loan or looking for a place to live.
Need help evaluating credit card options? Contact us today—our team would be happy to help.