Applying for a credit card is relatively easy these days, but there are a lot of factors that go into determining whether you qualify and, if you do, how much credit you qualify for. To maximize your chances of getting the right credit card, it helps to be prepared before you apply.
What to Consider Before you Apply for a Credit Card
With credit card offers continually arriving in the mail, and plenty of digital promotions popping up in email inboxes, a lot of consumers assume that applying for a credit card is no big deal. You may be thinking that when you see a worthwhile interest rate, rewards, or even a cashback offer, you can just go for it, right?
The truth is that having a credit card account is a serious financial responsibility, and in fact, it is just like any other type of financing. So before you apply, make sure you ask yourself these questions:
- What are your reasons for getting the new card: To build or rebuild your credit? For the rewards or other benefits?
- Do you have a plan for using the card? You should determine how much you can afford to purchase with the card each month so you can consistently pay off the balance. The problem with making only the minimum payments each month, is that you end up paying interest charges on your purchases, and worst yet, if you don’t even pay the minimum, your credit score will be negatively affected.
- Is your credit good enough to get approved? If you have a low credit score, or if you have applied for other lines of credit recently, which can lower your credit score and/or send the message to potential lenders that you’re desperate for credit, it may be harder to qualify for a credit card.
Get Your Credit House in Order
The best way to get a credit card is to make sure your credit is in good standing and you don’t have any red flags before applying. Generally, credit issuers will look at the following information to determine if you qualify:
- Credit utilization ratio – You want this ratio to be as low as possible—typically under 30%. Using too much available credit could increase the perceived risk you pose to a credit card issuer.
- Hard inquiries – If you’ve completed full applications for multiple cards or loans recently, this may signal to credit issuers that you are trying to get more credit than you can support. A hard inquiry may also lower your credit score by several points.
- Account age/number of accounts – Staying on top of your credit card accounts and other loans for a number of years, the longer the better, indicates that you’re capable of managing your finances responsibly. Having few accounts or a short credit history (a few months or only a couple of years) may signal to potential lenders that you’re a higher risk.
- Delinquencies – Not paying your bills on time, opens up the concern that you may not meet your obligation to repay a credit card issuer for purchases made with their card.
- Loan variety – Having a mortgage or another type of long-standing loan demonstrates that you have experience with more than just credit cards. It shows lenders that you can plan ahead and know what you’re doing when it comes to your budget and personal finances.
Do Your Research and Compare Credit Card Offers
Once you decide you are ready to apply, it’s time to start comparing cards. Your goal should be to find cards that are likely to approve you based on your credit score. Once you’ve identified a few options, then look for cards that will let you maximize rewards with travel benefits, points back for making everyday purchases, and other features, such as travel protection. Identify one or two that will work with your financial situation, goals, and lifestyle.
Pre-Approved vs Pre-Qualified vs a Full Application
When you receive offers, you’ll notice these say you are either “pre-approved” or “pre-qualified.” These terms indicate that you are conditionally approved, or qualified, for a credit card offer. These terms essentially mean you’re likely to be approved, but there’s no guarantee.
An invitation to be pre-qualified means a lender has asked you to start the application process in order to determine if you meet their financial-approval criteria from a soft inquiry. The card issuer uses this information to provide an interest rate and credit line that fits your financial situation, but they would have to look more in-depth (with a hard inquiry) in order to make a final decision.
On the other hand, a pre-approved credit card offer means the credit issuer already ran a soft inquiry, and you met certain financial approval criteria, but further review is warranted. Hence, they reached out to you, and if you accept the offer, they will make a hard credit inquiry to evaluate your credit history.
Keep in mind that in both cases, if you apply, you won’t necessarily receive the credit card. Especially if your credit score has gone down because of a late payment or a higher credit utilization ratio that took place after the issuer made the soft inquiry on your credit. In other words, if your credit score has decreased, or you are using more credit than before, you may no longer qualify.
Don't worry, you don’t need to be concerned about receiving pre-qualified or pre-approved offers. These soft inquiries will not reduce your credit score like a hard inquiry might.
It is only after you respond to a pre-qualified or pre-approved offer with a full credit card application, that the issuer makes a hard inquiry. When this happens, the inquiry will show up on your credit report. So keep in mind that when you sign and submit a credit card application, you are effectively agreeing to the terms and conditions in the contract. These terms should include fees, interest rates, rewards, and other details, so make sure you read them carefully before you submit your application.
Once you are approved, it’s time to start using your card so you can successfully build or rebuild your credit. With on-time payments and responsible card usage, you’ll hopefully be on your way to a higher credit score and all the benefits and perks that come with good credit.
