5 Things to Understand About Credit Before Applying for Cards
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
Credit cards are one of the easiest and quickest ways to earn points and miles — from sign-up bonuses to earning points on everyday spending and even getting some pretty neat perks on top of it all. It’s easy to get carried away with all of the options that are available, and it seems like issuers are coming out with new and better sign-up bonuses all the time. However, there are some definite pitfalls to the credit card game, so you have to be smart in order to come out ahead. Understanding how your credit score works isn’t that difficult, but it does take some time to understand what’s involved and what can alter your score.
No matter if you’re new to the travel rewards game or a seasoned award earner with a travel credit card, there are some things you need to know to ensure you can maximize on rewards credit cards that can get you traveling around the world for nearly free. Here are the five things you need to understand about your credit:
1. Know Your Credit Score
If you’re looking to get a new credit card, the quality of your credit history — which is simplified into a credit score — will play a large role in whether you’re approved. Your credit score is generally composed of five factors, although there are multiple ways to calculate a credit score. Two of the most commonly used score types are FICO Score and VantageScore. You can — and should — check your credit score frequently. Luckily, there are many ways to check your credit score for free. You can also request your credit report for free from each credit reporting agency once every 12 months to see what information is being used to calculate your credit score.
Your credit score is used by most lenders to determine your creditworthiness, but it by no means guarantees a decision. Even if you have a perfect score, you could still get declined for a specific card — and in that case, you’re best off calling the company for reconsideration. As you can see in the chart up top, your FICO score is comprised of: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% credit mix. By maintaining your credit score, you’ll be well on your way to getting approved for a rewards credit card and starting to earn points and miles.
2. Don’t Carry a Balance
This is pretty straightforward: If you carry a balance on your credit card, your score will drop. And, the interest paid will negate the value of any miles and points you earned on the card. Despite those obvious downsides, Federal Reserve reports show that 42.5% of Americans carried a balance on their cards at least some of the time in 2016. And, Americans incurred more than $100 billion in credit card interest and fees between Apr. 1, 2017 and Mar. 31, 2018. To me, that’s crazy! If you’re going to get a travel rewards credit card — especially a charge card — it’s extremely important to pay your statement off in full each and every month. This will keep your credit score in check, save you money and let you maximize your rewards output.
If you’re currently carrying a balance on one or more credit cards, you must get rid of your credit card debt. If you can handle a new credit card responsibly while doing so, a balance transfer credit card could help you avoid interest charges while you work to pay off your debt. Or, 0% introductory APR credit cards can help you finance a large purchase. But, if you’ll be too tempted to spend beyond your means with a new credit card, then credit cards aren’t for you.
3. Know Each Issuer’s Rules
Knowing the rules and requirements of each issuer is an important part of being successful with rewards credit cards. Each issuer has different rules that are important to keep in mind as far as benefits for sign-up bonuses and other perks. For example, Chase’s 5/24 rule means that Chase will not approve you for many of its cards if you’ve opened five or more personal cards across all banks in the past 24 months. So, it’s best to start with the Chase Trifecta or Chase Quartet to earn you transferable points before you get a bunch of other cards, as you know you’ll have those cards without having to worry about the issuer’s 5/24 restriction in the future.
Other issuers have specific restrictions as well. For example, American Express recently started considering not only whether you’ve held a particular card before, but also your overall behavior opening and closing American Express cards when determining your eligibility for its welcome bonuses. Luckily, Amex provides a tool to check your eligibility for a welcome bonus before applying. I’d suggest looking at which sign-up bonuses will give you the most bang for your buck, applying for your high-priority cards sooner and spacing your applications out.
4. Don’t Bite Off More Than You Can Chew
Cards offering large welcome bonuses usually require you to reach a minimum spending requirement within a particular time frame. This minimum spending requirement is important to keep in mind when you see an amazing sign-up bonus, since you’ll need to spend this amount of money in order to get the points. In the past, we’ve seen some pretty astronomical welcome bonus minimum spending requirements. One current example is The Business Platinum Card® from American Express, which offers 75,000 points after you spend $15,000 on qualifying purchases within the first 3 months of account opening.
It’s important to not get caught up in the flashy sign-up bonuses without thinking about the pressure you’re putting on yourself financially to meet the spending requirements. There are many ways to reach that requirement, such as prepaying expenses and using Plastiq, but it could also cost you if you don’t meet the mark. When you sign up for a credit card, the clock usually starts ticking when you get approved and not when you activate a card, so plan accordingly. Another thing to take into consideration is that the annual fee you might have to pay on a credit card does not count toward the minimum spend requirement. Don’t bite off more than you can chew when it comes to minimum spending requirements — it’s not worth it in the long run to jeopardize carrying a balance and stressing you out financially.
5. Personal vs. Business Cards
I think one of the most common misconceptions about rewards credit cards is that you have to own a large business in order to get a business card. This is entirely untrue. In fact, business cards are meant for small businesses — even ones that are just starting and want to separate business expenses from personal — as well as for individuals to use. Just because a card is labeled as a business card shouldn’t stop you from applying. Business welcome bonuses can be huge, and the benefit of opening a business credit card is that many — but not all — business cards report only to the business credit bureaus.
It’s worth noting, though, that business credit cards are not protected under the same consumer protection laws and interest rates and fees are generally higher. But, you shouldn’t be carrying balances on your cards anyway. I’m a big fan of the Ink Business Preferred Credit Card, American Express® Business Gold Card and The Business Platinum Card® from American Express, although there are many business credit cards that can be great for personal use. Don’t shy away from applying for a business card, as they can offer you huge welcome bonuses and benefits.
No matter if you’re a beginner in the points and miles hobby or a seasoned award traveler, there are some things that are definitely worth knowing before signing up for a new credit card. I can’t stress enough how important it is to keep track of your credit score, as it’s the leading determinant of your creditworthiness when applying for a new card. That being said, you never want to carry a balance and you shouldn’t bite off more than you can chew when it comes to minimum spending requirements. It’s easy to be distracted by big sign-up bonuses, but always keep an eye out for the best deal available, whether that be a personal or business card, and keep track of each issuer’s rules. By keeping these points (no pun intended) in mind, you should be well on your way to credit card approval and traveling around the world using your points and miles.
Featured photo by coldsnowstorm / Getty Images.
WELCOME OFFER: 60,000 Points
TPG'S BONUS VALUATION*: $1,200
CARD HIGHLIGHTS: 2X points on all travel and dining, points transferrable to over a dozen travel partners
*Bonus value is an estimated value calculated by TPG and not the card issuer. View our latest valuations here.
- Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $750 toward travel when you redeem through Chase Ultimate Rewards®
- 2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases.
- Get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards. For example, 60,000 points are worth $750 toward travel
- Get unlimited deliveries with a $0 delivery fee and reduced service fees on orders over $12 for a minimum of one year on qualifying food purchases with DashPass, DoorDash's subscription service. Activate by 12/31/21.
- Earn 5X points on Lyft rides through March 2022. That’s 3X points in addition to the 2X points you already earn on travel.