Applying for a credit card isn’t a difficult process. The major credit card issuers have online applications that can sometimes inform you within minutes if you’ve been approved for the card. But there are some factors to keep in mind when applying to ensure that your credit score doesn’t suffer unnecessarily.
Let’s explore some guidelines to help your financial decision making in this process.
When Is the Best Time to Apply for a New Credit Card
It doesn’t matter when you apply for a credit card. Applying on a Tuesday is no different from a Saturday. Applying in January is no different than applying in June. It’s not like you’re buying an airline ticket where prices are changing on a daily basis based on customer demand.
It’s important to only apply for one credit card at a time. Don’t apply for three credit cards over the course of a single day. Your credit score may suffer if you do. From the eyes of the credit bureaus, which help tabulate your score, applying for multiple credit cards within a short period of time is viewed negatively. It looks like you are hungry for credit or perhaps in financial difficulty and need immediate access to lines of credit. Someone in financial difficulty is less likely to pay back the expenditures charged on the credit card.
Spacing out your credit card applications may lessen the negative impact on your credit score. You may even want to let as many as six months pass between applications. This will show the credit bureaus that there’s no urgent or pressing need for you to have this credit card.
If you’re applying for a credit cards solely to gain reward points benefits, there are a few factors to keep in mind. Many credit cards will offer 30,000 to 50,000 airline miles or rewards points upon opening up the credit card. This is a significant perk. After all, 50,000 airline miles could be enough for a round-trip international flight.
But with those perks come some stipulations. Those points don’t come within minutes after opening up the credit card. Chances are you’ll have to spend an average of $3,000 within the first three months of receiving the card. This is a strict deadline. Having pressure to spend money within a given time could be a recipe for financial disaster.
It may sound easy to spend $3,000 in three months, but if you’re purposely spending money on items you don’t need just to meet this threshold, then these airline miles are not truly free. Plus, if you leave part or all of this $3,000 balance on the card and fail to pay it back in full, you’ll end up paying expensive interest charges which further erode the value of the free miles.
Don’t Close Your Credit Card
If your plan is to open up a credit card, gain some airline points and then close the credit card after a few years, your credit score may suffer. This is because some 15% of your credit score accounts for your credit history or how long your cards have been open. If you close down your credit card account, you are deleting credit history from your credit file. That will ding your score. It won’t be a significant ding. It won’t be as bad as having a debt balance or making payments past the due date. But if you’re in the market for a mortgage or a car loan and lenders will be checking your score, every point matters. Even as little as 30 points in your credit score can make noticeable differences in whether or not the bank approves your request for a mortgage or car loan and the amount of interest you’re charged on this loan.
If you end up closing down the credit card a few months after opening it (instead of a few years), the impact on your credit score should be negligible because there isn’t a great deal of credit history attached to the credit card.
Be Careful of Retail Credit Cards
It’s happened to all of us. You’re in a store and you see a poster near the cash register promising a 15% discount at the store if you open up a store-branded credit card. It seems like a good deal, especially if you’re about to redo your wardrobe. But opening up retail store credit cards could hurt your credit score. Some 10% of the credit score looks at the types of credit you have. Retail credit cards may be viewed as a sign that you’re hungry for credit and the store discount. The appearance of increased credit appetite is a red flag in the eyes of the credit bureaus.
Plus, the interest rates on retail credit cards tend to be higher than traditional credit cards. A traditional credit card may have an annual percentage rate of roughly 15%. A retail credit card may have a rate in the low to mid 20s. While this rate only applies if you leave a balance on the credit card, it will easily wipe away the store discount you scored by opening up the credit card.
How Many Credit Cards Do You Need?
There’s no rule of thumb in terms of how many credit cards you should have. It’s simply a personal preference. Just keep in mind the fact that many credit cards have annual fees of $100-$500 a year. It can be expensive to service multiple credit cards.
While having 10 credit cards may be expensive and unnecessary, having at least one credit card is needed to build up a credit history. Responsible use of a credit card (on-time payments, no debt) is the main way to develop a high credit score. A high credit score is needed to score lower interest rates on mortgages or car loans. The lower the interest rate, the lower your monthly payment will be on these loans.