Applying for a credit card is easy! Just fill out the application, send it in, and wait for your new card to arrive in the mail a week or two later, right? But then you get denied and there’s no card with your name on it coming in the mail. The envelope even said you were pre-approved! The commercials on TV made it look super easy and everyone loves the card you picked because of all the cash-back rewards and fancy features that come with owning it.
The truth is, applying for a credit card can be a challenge for some consumers for any number of factors. When you applied, the way you completed the application, your current credit history, and FICO score all play a part in whether you are approved or rejected. Consumers with impeccable credit usually have an easier time of it, of course, but for the rest of you who may not have an excellent score you have some obstacles to navigate ahead. Don’t worry, it’s nothing you can’t overcome with just a little smart planning.
This article is going to look at all of your options, the choices you have when it comes to selecting the right card for your financial situation, and some do’s and very important don’ts that you need to be cognizant of when you’re ready to apply for that credit card. In many ways, this process is very similar to asking a bank for a loan. You’re requesting that they extend you a line of credit that you are promising to pay back, with interest, over time.
Granted, this process isn’t as exhaustive or penetrating as a loan application but you will be judged by much of the same criteria. Your credit history, your spending and bill payment routines, and the amount of other credit cards (and therefore, credit card debt) you also hold are some of the major components that are considered by a bank. So let’s talk about credit cards and how you can get one as easily as possible.
What’s the APR?
It seems that we are inundated with advertisements for credit cards from all the major companies. You can’t watch TV without seeing at least one commercial for Capital One or American Express each hour, offering multiple benefits and rewards for keeping their card in your wallet. We all need a credit card these days, so why not these cards?
There are so many banks offering MasterCard and Visa, not to mention the variety of options from American Express and Discover, that it can be a bit daunting which card is the best one for your particular lifestyle. You probably get offers in the mail on a regular basis, there are even entire websites devoted to helping you select a credit card like you would an airline flight.
Here is your first hint to getting the right card: do your homework! You need to know exactly what you’re getting into when you apply for that card.
The first thing you want to look at is APR. That stands for Annual Percentage Rate and it’s the interest rate you will be paying the credit card company for the privilege of using their card. That is, only if you hold a balance on that card. It’s like anything else where debt is concerned, you’re going to be paying extra on the money you owe. If you’re one of those responsible consumers who pays his or her credit card bill in full by the due date each month, then APR isn’t really going to be a problem for you.
However, if you do carry a balance and can’t pay in full every month, then APR is something you need to be well aware of before you apply. Did you know there could be different APR’s for each of the ways you use the card? Purchases may have one rate while cash advances may have another. Some cards can apply a penalty APR to your account which raises your rates due to missed or late payments.
But the card you applied for has a 0% APR, you don’t have to worry about any of that stuff, right?
Well, look closer, while many introductory 0% APR offers are quite good (and you should consider taking advantage of cards with these enticing proposals) but they do end after a determined amount of time. For many cards, that 0% APR is only good for a year, in some cases you may find such offers extended for far longer (the Citi Simplicity card has a 21-month introductory period at the moment). But with these cards in particular, you need to be careful about knowing what the rate will jump to after that introductory period is up. It could be very high based on your creditworthiness to the companies.
Most APR’s can be as low as 11.24% to as high as 26.24%. Those are both a far cry from 0% and the penalty APR’s can go even higher than that. This is why you need to know what you’re facing in the event you begin to accrue some debt on your credit card. The higher APR will only continue to feed that debt and that’s how you get in trouble.
Rewards
You may have gotten some unsolicited offers or seen the advertisements for credit cards that offer rewards for using the card. There is no shortage of deals out there, enticing consumers with those 0% introductory APR’s, cash back rewards that let you earn a percentage of the money you spend back to your account based on the things you normally buy everyday, and other benefits of ownership from travel and purchase insurance to early access on concert and theatre tickets before they go on sale to the general public.
As American Express used to say, membership has its privileges, and you may be dazzled by all of these wonderful rewards. But just keep in mind, the way you earn these rewards is by spending money. The companies offer you anywhere from 1% all the way up to 6% back on your purchases at department stores, gas stations, grocery stores, and so on. These categories can sometimes change and you only get the rewards back on those specific types of purchases from month to month.
It all sounds very attractive and the theory behind the practice is that you’ll be spending that money on those things anyway (we all need to buy food and gasoline), so why not get paid back for it?! Just be careful because this is one of the surest ways to get into debt.
However, if you are looking to apply for a credit card, many of these are good choices. You can redeem your rewards towards paying down your bill or receive them as an actual cash deposit into your account. Cash back on your purchases is just the tip of the iceberg for some of these cards. Many of them offer bonuses just for signing up, others have no annual fee for owning the card, and you can even get enrollment in a variety of concierge and protection programs, some of which also offer FICO score access.
Not all credit cards have these cash back rewards policies, some are just standard cards that can give you a sensible APR. The type you choose is up to you but it’s important to know that a majority of these cards are intended for consumers with really good FICO scores, though there are some that cater to applicants with less than stellar credit.
Five Smart Steps to Getting Approved
So you’ve done your homework, looked into the myriad of credit cards that are on the market and you’ve targeted a couple that you think are the right one for you and your lifestyle. Now you need to apply and the goal is to get approved. But before you fill out that application form, there are some steps you can take to stake the odds in your favor. Depending upon your financial situation, you may need to do some advance planning in order to make the credit card companies more willing to take you on as a financial risk. Here are five steps you will want to consider to help your cause.
1. Check Your Credit Report
Your credit report is the first major hurdle to your being approved for the credit card you want. The FICO score on your report is the first thing banks and credit card companies see when they’re making a decision on you, so you will want to see it first. If you haven’t looked at your credit report or your score lately, then you can request one for free from the major credit bureaus on an annual basis.
When you receive your score, you can apply it against the same scale that the companies use in determining the reliability of your credit. Poor credit is any number that falls between 300-630. If you’re in this range, you have a very steep uphill climb ahead of you. But don’t despair, you still have some options. Average credit falls between 630-689, good credit is 690-720, and anything above that is excellent.
But it’s not just only about your score; your report tells a bigger story as well. Card issuers want to see if you’ve been current on your payments or missed any lately, they look to see if any accounts currently are or have been in collections, they also want to see how much debt you have with other credit cards or current loans. It’s true that having at least one or two other credit cards on your credit report can help your cause in getting approved for another, but only if you’ve kept those balances low and demonstrated a consistent routine of paying the bills on time and more than just the bare minimums per month.
2. Clean Up Your Finances
If your credit report has some less than flattering things to say about your financial situation, then it would behoove you to fix those problems before you apply for any credit card. That starts with reducing your debt and establishing a pattern of consistently paying bills on time and more than the minimum amount due. Pay down some of those high credit card balances and be sure you pay things on time. Take care of those accounts that are in collections and be careful with “settling” them versus paying them off in full.
Many collection agencies will send you offers to settle your debt for a fraction of what is owed. Sounds pretty great up front but it could end up doing you long-term damage after the fact. When you settle, the credit bureaus can sometimes denote the account as such instead of showing it as paid off. This becomes a red flag for the credit card companies (and any lender) because it shows that your creditor didn’t receive all of the money to which they were entitled. The reason why you settled isn’t denoted on your report, just a marker as settled which brings up more questions as to your trustworthiness. This can be the reason you get denied for a new credit card. So when you’re checking out your credit report and there are items on there that need to be paid off, pay them off in full. It will be much more beneficial to you in the long run.
3. Know Your Credit Utilization Ratio
A major component of cleaning up your finances is knowing your credit utilization ratio and ensuring that it stays at a certain moderate level. This ratio is determined by taking the balance on your credit card and dividing it by your credit limit. The result is a percentage that the credit card companies consider in their decision to issue you their card.
Here’s a good rule of thumb to keep in mind – the lower your balance in contrast to your limit, the better. If you have a card with a limit of $10,000 but you keep your balance around $3,000, then your ratio falls around 30%. That’s the sweet spot you want. You may have more than one card and that can also affect your ratio. Just because you keep a balance of $3,000 on one card with a limit of $10,000 but you have a $7,000 balance on another card with the same limit, doesn’t mean you’re at 30% anymore.
The balances on all your cards play a factor collectively so be sure you know what your true ratio is before you apply. Then pay down some balances if necessary.
4. Be Selective
Here’s a fact you may not know: Every time you apply for a credit card, your credit report and score are affected. The application ends up on your report whether or not you were approved. So now that you’re armed with this information it seems pretty obvious that applying for a barrage of credit cards is only going to prove detrimental to your goals.
We all get those credit card applications in the mail and many of you are probably tempted to open them and take a shot at getting approved. Don’t. Not unless you’ve done your homework first and you’ve taken every precaution for success. Applying for a card that you know you’re not going to get approved for because your credit isn’t good enough or you just can’t handle it after any low or no APR introductory periods expire will just help to prevent you from getting a credit card at all.
So be selective by knowing your credit score and researching which cards you are eligible for and which offers the greatest chance of being approved. This will go a long way to helping you secure a credit card that you really want.
5. Don’t Take NO for an Answer
If your application for a new credit card was rejected, you should at least find out why you were declined. Feel free to contact the credit card company and inquire about the details of your application. Many credit card companies have hotlines to call and discuss your application over the phone, but before you call you should be well-prepared to plead your case.
Have a copy of your credit report for reference – it should be the same one they have on their end. Present your reasons why you feel like you should be approved, point out examples that show you can be a trusted cardholder, and explain any inconsistencies or negative aspects of your report. Take a polite tone, don’t get confrontational, and don’t take it personally. This company doesn’t know you and they didn’t make this determination based on you as a person. They looked at your credit report and your score and made a decision based on what was written on a piece of paper. Hearing them tell you “no” gives you a chance to try and convince them otherwise. If their decision remains final, then you can move on. Remember, you’re not out of options just yet.
Some Other Options
You’ve tried everything. You paid down some balances, worked to get that score up, but alas, you’re still getting denied. Maybe your financial hole is just a bit too deep to dig out from and reading this article proved that beyond a shadow of a doubt. A credit card doesn’t seem to be in your future. No matter your circumstance, that is not true.
There are some viable alternatives available to you and they’re still cards that are widely accepted by merchants and retailers around the world. We’re talking actual Visa or MasterCard instruments. In fact, you have three similar alternatives to getting a card, one of which will also help you rebuild your credit and others that won’t. They work just like real credit cards, though some may charge higher fees for the privilege of using them.
The first of these is a secured credit card which almost anyone can apply for and receive because it requires you put up a deposit of some kind. That number can vary based on the card, but some of them require an up-front payment as low as $100 and as high as $500. That deposit is used as security in case you default on a payment. But as long as you stay current on your bill each month, then you won’t even know the difference. These cards often have far lower credit limits but they do report to the bureaus so demonstrating a responsible pattern of payment can help you raise your FICO score.
The second option is a prepaid credit card where you fill the card up with a cash amount and when that’s been exhausted the card is no longer any good, until you replenish the account. This card won’t do anything for your credit and often comes with very high fees for usage.
The third option is to open a checking account with a major bank that issues you a Visa or MasterCard debit card tied to your account. This also won’t help your credit score but it’s similar to a prepaid card just without the potentially high fees.
Our Final Thoughts
Getting a credit card isn’t a complicated process. In fact, it’s pretty simple. The credit card companies want to give you a credit card! Why else would you get buried in offers through your mail every week? But they also want to know that you’re a smart risk for them.
If you can take some steps toward convincing lenders that you can pay off your balances on time and keep debt low, then why not take them? Cleaning up your credit report will only benefit you and it won’t be just credit card companies offering approvals either. A good or excellent FICO score will open many more doors for you as well. It’s about being smart with your credit cards and the balances on each of them. If you can do that, you can get a great credit card at a great rate.
