7 things to understand about credit before applying for cards
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Credit cards can provide valuable rewards and exclusive travel perks. But, some consumers make major mistakes with travel rewards credit cards that can affect their credit for years to come. Regardless of whether you’re planning to apply for a travel rewards credit card, student credit card or secured credit card, here are seven things you should understand about credit before you apply for a new card.
Know your credit score
If you’re looking to get a new credit card, your credit history – which is simplified into a credit score – will play a large role in whether or not 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 and VantageScore. Although the exact formulas used to calculate these score types aren’t publicly available, FICO discloses that your score is comprised of 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% credit mix.
Related reading: How does applying for a new credit card affect my credit score?
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 a year to see what information is being used to calculate your credit score. And, many credit cards offer a free FICO Score to cardholders.
Your credit score is used to determine your creditworthiness, but it by no means guarantees a decision. Even if you have an excellent credit score, you could still get declined for a specific card. This is because credit card companies also consider other factors when deciding whether to approve an application.
But, your credit score should help you determine what types of cards you may be able to get. For example, if you have a low credit score, you may need to start with a student card or a secured credit card to build your credit.
Don’t carry a balance
This is pretty straightforward: If you carry a large balance on your credit card, your score will drop. And, the interest you’ll need to pay will negate the value of any rewards you earn on the card. So, it’s extremely important to pay your statement balance in full every month. Doing so 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. A balance transfer credit card could help you avoid interest charges while you work to pay off your debt. Likewise, using a 0% introductory APR credit card might be able to help you finance a large purchase. But, if you decide to open a new credit card, you must prioritize paying off your balance before you’ll start accruing interest.
Related reading: Ten commandments for travel rewards credit cards
Pay attention to your credit utilization
As noted above, amounts owed account for 30% of your FICO Score. This impacts your credit utilization ratio, which is the relationship between your balances and your total available credit across revolving accounts (including credit cards). We don’t know exactly how credit score calculations use credit utilization, but it’s generally a good idea to keep your credit utilization ratio below 30%.
If you only have one credit card with a credit limit of $10,000 and want to keep your credit utilization ratio below 30%, you shouldn’t let your balance go above $3,000. But, if your credit utilization creeps above 30%, you can always simply make a payment on your card to lower it. Of course, when you open a new credit card or request a credit limit increase, your credit utilization will drop because you’ll have more credit available. Likewise, if you close a credit card or get your credit limit decreased, your credit utilization will increase because you’ll now have less credit available.
Related reading: 5 credit myths you’ll want to unlearn
Get and keep a no annual fee card
One of the first cards you should apply for is a no-annual-fee credit card. It may be easier to get a no-annual-fee card with minimal benefits even if your credit score is relatively low, as some of these cards are specifically designed for cardholders with poor to average credit. Using this card responsibly can help you build credit and boost your credit score. Plus keeping this card long term can help your credit score by increasing the length of your credit history.
To keep your account active, you’ll want to use this card for at least a few purchases each year. For example, you could charge a bi-annual subscription to the card and simply set up autopay on your account so you don’t accidentally forget to pay your credit card bill.
Related reading: Why you should get (and keep) a no-annual-fee credit card
Know each issuer’s rules
Knowing the rules and requirements of each issuer is an important part of being successful with credit cards. Each issuer has different rules that are important to keep in mind as far as sign-up bonuses eligibility and card 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 apply for cards in the Chase Trifecta or Chase Quartet to earn you transferable points before you get a bunch of other cards. This way, 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 considers 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.
Related reading: Can you have more than one credit card from the same ‘family?’
Don’t bite off more than you can chew
Cards offering large welcome bonuses usually require you to complete a minimum spending requirement within a particular time frame. This minimum spending requirement is important to keep in mind when you see an amazing welcome bonus, since you’ll need to spend this amount of money to get the bonus. In the past, we’ve seen some pretty astronomical welcome bonuses. One current example is The Business Platinum Card® from American Express, which offers 85,000 Membership Rewards® points after you spend $15,000 on eligible purchases with the Business Platinum Card plus earn 5x points on eligible purchases in 5 select business categories, up to 80,000 bonus points per category, all within the first 3 months of Card Membership.
It’s important to not get caught up in the flashy bonuses without thinking about the pressure you’re putting on yourself financially to meet the spending requirements. The clock usually starts ticking when you get approved and not when you activate a card. Another thing to take into consideration is that the annual fee you might have to pay on a credit card usually won’t 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 or potentially miss earning a welcome bonus.
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 to get a business card. This is entirely untrue.
Business cards are meant for small businesses — even ones that are just starting and require separation of business expenses from personal — as well as for individuals to use. Just because a card is labeled as a business card, that shouldn’t stop you from applying. Welcome bonuses on business credit cards 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 personallly a big fan of the Ink Business Preferred Credit Card, The Blue Business® Plus Credit Card from American Express and The Business Platinum Card® from American Express. Don’t shy away from applying for a business card, as they can offer you huge welcome bonuses and benefits.
Related reading: The best business and personal credit card combinations
No matter if you’re a beginner in the points and miles hobby or a seasoned award traveler, some things are 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.
Additional reporting by Katie Genter.
Featured photo by coldsnowstorm/Getty Images.
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