What to Consider When You Apply for a Credit Card

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The Credit Sesame guide on what to consider when you apply for a credit card.

Do you want to apply for a new credit card?

Used wisely, a credit card can be a useful way to manage cashflow or spread the cost of larger expenses. Perhaps surprisingly several credit cards with low balances can be useful in helping to improve your credit score. In addition, many card have cash-back and reward options can provide real value. Before your apply for a new credit card there are a number of questions you should ask.

1. What are your chances of a successful application?

You should not apply for a credit card unless you are reasonably confident of success. When you apply for a credit card your credit score takes a small but meaningful hit. This credit score reduction is temporary but should be avoided if you do not believe your credit application will be successful.

Most card issuers give guidance on credit scores of applicants likely to be successful. If you cannot find this information online, don’t hesitate to call card issuers to discuss their criteria for success.

It is better for avoid multiple credit card applications within a short period of time, particularly if you are likely to be rejected.

Credit Sesame offers free credit monitoring and can provide approval odds for credit card applications.

2. How much balance do you plan to carry over each month?

Whether you pay off in full every month or carry a balance, and the amount of that balance, has an impact on the interest you pay and your credit score.

Pay off in full every month

There is no interest charge when you make a purchase and pay off your credit card in full at the next due date. If you are sure you will never carry a balance forward at the end of each month, you do not have to worry about the card’s interest rate or, more importantly, its annual percentage rate (APR).

Sometimes carry a balance forward

Suppose you might just occasionally see a mid-ticket item for $1,000 or less and then treat yourself. You might choose to charge the purchase to your card and pay down the debt over two or three months.

That’s probably fine. The Federal Reserve reckons that the average credit card rate in the United States was 16.17% in April 2022. And, according to the Calculators.com credit card tool, you would repay that $1,000 at $342.36 a month over three months. Your total interest paid would be $27.07.

That is probably affordable to most. And it is up to you whether you regard it as value for money.

Always carry a balance forward

However, things are very different for those who see credit cards as a way to borrow over the longer term. Some people never zero their balances. And, for them, the APR on a card should be the first thing they look at when considering making an application.

We just quoted the Fed’s figure of 16.17% as the average card interest rate. However, that really is an average, and outliers on mainstream, famous-name cards run from 13.49% up to 26.49%, according to a US News article.

The rate you pay will depend on your credit score and other factors. If you stray far from that mainstream, into subprime territory, card rates can reach frightening heights.

It is all too easy to allow credit card interest payments to grow and end up a significant drain on your household budget. So closely monitor how much you are paying, and be ready to reduce your card balances if things start getting out of hand.

3. Do you need to reduce your credit card balance(s)?

Try borrowing using a personal loan if you need credit to zero your card balances or make purchases. Those generally have appreciably lower APRs than plastic.

And you should consider a balance transfer credit card with a long introductory rate of 0%. Just make sure you can clear your balance before the standard rate kicks in.

While you’re watching your interest payments watch your interest rates, too. Credit card rates are typically tied to indexes that are related to the Federal Funds Rate. At the time of writing this article, the Fed had recently hiked that rate and was signaling that it planned many more increases. So expect your cards’ rates to rise, too. Never apply for a credit card if you are not confident you can keep up with payments.

4. Will your credit score be affected by a credit card application?

The standard advice for those concerned about their credit score is not to open or close accounts unnecessarily. However, this is important mainly before you apply for a big new loan — a mortgage, say, or auto loan.

When you apply for a credit card (or any new account) your score will take a small hit. However, it should recover from that after a few months of responsible use.

There is another way in which getting a new card or closing an existing account damages your credit score. It reduces the average age of your accounts.

FICO, the company behind the most widely used scoring technologies, says:

Although the length of your credit history only accounts for 15% of your FICO® Score, it’s still an important influence on lenders. It can definitely impact the chances of whether or not you get a loan.

What to consider

How great or small the damage will be will depend on several factors, including:

  1. How recently you opened the account you’re closing (the more recent the better)
  2. The number of existing accounts you have open (the more accounts the better)
  3. The average ages of those existing accounts (the older the better)

Of course, none of this means you can never open or close credit cards or other accounts. Just don’t do so unnecessarily. And time such changes when you can live with a temporarily lower score.

5. Do you want to pay an annual fee?

Some people won’t apply for a credit with an annual fee. If that is your policy, you may wish to take a moment to review it. Some annual fees can pay for themselves many times over in cash back, points or miles, not to mention perks. If rewards don’t interest you, there are plenty of credit cards on the market with no annual fees.

Not all credit cards with annual fees are generous. But plenty are competitive. It’s worth pausing for thought when you apply for a credit card.

6. Are credit card rewards important to you?

Chase Bank suggests a four-step process to make sure your next card delivers the rewards you expect:

  1. Work out your likely expenditures in particular spending categories that are important to you for the following month
  2. Check your candidate cards’ offerings to calculate the rewards each card should deliver that month
  3. Multiply that by 12 for your annual rewards. Deduct any annual fee
  4. If your card delivers miles or points, see how much those will really be worth to you at the end of that first year

Be sure to shop widely for your candidate cards. There are hundreds out there and you need to whittle those down to a manageable shortlist.

Is there a reward card that aligns with your lifestyle?

The most obvious examples of aligning a card’s rewards with your own lifestyle are airline cards, travel or hotel cards. However, there are probably plenty of people whose rewards cards don’t align as closely with their interests and needs as they could.

Credit card companies know it can be worth creating card offerings that appeal to particular groups of people. For example, some cards are particularly rewarding for those who enjoy dining out. Others are good for commuters, concertgoers, those with gas guzzlers and so on.

Choosing the right card

There are hundreds to options to consider when you apply for a credit card. Make sure you you choose a card that suits you and your individual circumstances. One size does not fit all.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Peter Warden
Peter Warden has been writing for 14 years about personal finance, credit cards, mortgages and insurance. His work has appeared across a wide range of media, and he is an editor at The Mortgage Reports. He lives in a small town with his partner of 30 years.

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