Summary: There are a few things to consider before applying for a credit card that you should know. We discuss your credit score, income, credit history and other important factors you should know.
You should never rush into anything in life and this includes applying for a credit card.
Applying for a credit card is nothing to be afraid of, but it could make you a little nervous if you’re not prepared and don’t do your research ahead of time.
The New York Federal Reserve Credit Access survey from December 2019 found that 45.8% of participants applied for credit during the past year.
Applying for a credit card is so easy these days since you can take care of the process online in just minutes.
However, before you join the masses and apply for your next credit card, here are a few crucial things you should know beforehand.
Your Credit Score
Of course, you want to have an idea of what your credit score is before you apply for a credit card. Understand that some cards may not approve you if your credit score is bad.
In fact, 17.6% of the people from the New York Federal Reserve survey who said they applied for new credit got rejected due to a credit score dip.
There are multiple ways to check your credit score on your own including third party sites like Credit Karma and Credit Sesame, your bank, and even an existing credit card that may provide you with a monthly or quarterly update on your score.
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If your credit is fair or poor, you may want to look at applying for a credit card that is specifically designed for people with lower scores.
In fact, some secured credit cards don’t even check your credit and encourage people who are looking to build a positive credit history to apply.
Financial Assets and Income
You’ll need to share specific financial information when you apply for a credit card.
This includes your annual income, your monthly mortgage or rent payment, current employment status, and other assets.
If you’re also adding an authorized user to the application, the credit card issuer may require a social security number for this person as well.
For example, Discover requires that you add the first and last name, address, date of birth, and social security number for all authorized users to your application.
Be sure to have this information on hand when you apply to speed up the process.
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Are You Prequalified?
Some credit card companies may prequalify you for a particular card before you even think to apply. Perhaps you’ve received some mail or emails that stated you were ‘preapproved’ for a credit card.
To pre-approve you for a credit card, the company often has to go through a pre-qualification process which involves screening your basic credit information to see if you meet their standards for applying.
Keep in mind that a pre-approval won’t hurt your credit or show up as a hard inquiry since the credit card company initiates this. However, when you follow up by filling out an official credit card application, this will result in a hard inquiry.
Getting pre-qualified could be great news because it means you’d more than likely get approved once you complete the credit card application (so long as your situation hasn’t drastically changed since).
If you’re worried about getting approved for a credit card, see if there is a credit card preapproval form you can fill out online beforehand like this one before you apply and they pull your credit report.
Rates and Fees
It’s no secret that many credit cards come with fees.
One of the biggest costs you can incur is interest charges. Interest charges occur when you carry a balance from month to month and the charge can vary based on your credit card’s APR.
To understand the fees and conditions you’ll have to review during a credit card application, it’s important to understand the terminology.
- Annual Fee - This is a yearly fee that a credit card issuer may charge in order to continue using your card. Not all credit cards have an annual fee but some do especially the ones that offer rewards or perks. Sometimes, the card issuer will waive the annual fee for the first year, which means you won’t have to pay it for at least 12 months. Still, if you plan to keep the card for longer than a year, this is a cost you’ll need to factor in.
- APR - APR stands for Annual Percentage Rate which is the interest you’re charged over a 12-month period. For example, a card with a 25% interest rate costs 2% on the balances you carry from month to month. Notice that the credit card may charge a different APR for new purchases vs what they charge for cash advances. Typically, you might get charged a higher APR for cash advances.
- Foreign Transaction Fees - If you’re planning on using the credit card outside of the country, a foreign transaction fee may apply. Some credit cards don’t have a foreign transaction fee so this would be something to look for if you plan on traveling with your card.
- Late Fee - Credit cards can charge late fees ranging anywhere from $28 - $39 depending on how many times you’ve missed your payment due date. To avoid late fees, you can always set up automatic bill pay through your credit card company.
Knowing the incentives involved with using a certain credit card beforehand can only help you maximize the benefits you’ll get.
For example, some cards offer cashback bonuses during certain times of the year and in certain categories while others will offer you a generous sign-up bonus after spending a minimum amount during your first few months.
You probably don’t want to find out that you missed earning 5% cashback on groceries you would have purchased anyway. Or even worse, knowing that you missed out on 50,000 bonus points because you didn’t plan to meet the minimum spending threshold within the three months of using your card.
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Carefully read through the card details before applying. Then, make sure you understand all the incentives and bonus offers so you won’t miss out on any of these perks
Your Spending Habits
Before you apply for a credit card, it’s always an idea to know how you plan to use it.
Are you going to use the card for all of your purchases?
Are you only going to use it for groceries and gas?
Will you consider using it for emergencies?
When dealing with a Secured Credit Card you get to choose your own credit limit, you should start with a good amount.
At least 48% of credit cardholders use their card for online shopping while 25% - 27% use their card for recurring bills and grocery shopping.
Knowing what your spending habits will be like can also help you decide on the best credit card to fit your needs. If you plan on only using your card for emergencies, you may want to go with more of a no-frills, low fee, and low-interest rate card.
On the other hand, if you want to use your credit card for everyday expenses, you may want to choose a card with a solid rewards program.
Never rush into applying for a credit card. Even if the incentives sound great, realize that the offer may be around for a few weeks allowing you the time to do your due diligence and read the fine print.
Make sure you are monitoring your credit score regularly and are clear on your intentions for using the credit card before you apply.
Chonce Maddox is the owner of My Debt Epiphany, a personal finance blogger and freelance writer who enjoys sharing debt stories (as she and her husband work their way out of $40,000 in debt) along with talking about saving, budgeting, conscious spending and improving your financial house. In her spare time,she enjoys working out, playing sports with her son, cooking, and thrifting.