This post is sponsored by Lexington Law.
According to a new survey, 51% of people don’t feel confident opening up a credit card. Credit can feel confusing and complicated and with so many credit cards available, it’s hard to know which one is the right one for you.
Knowing your intentions for why you’re interested in a new card, where your credit currently stands, and what your future plans are to help you make better strategic decisions when it comes to your credit cards.
If you’re opening a card to purchase things you don’t have the cash for, it’s probably best to hold off. Putting yourself in more debt is not a smart move. As of December 2017, Americans owed a total of $834 billion in credit card debt. Let’s not add more to that statistic. Ask yourself these questions before you submit your applications for a new credit card.
Here are 8 questions to ask yourself before opening a new credit card:
1. Is the ding to your credit score worth it?
Opening a credit card puts a hard inquiry on your credit report. Multiple hard inquiries in a short amount of time can ding your score by a few points each which could overall have a dramatic impact on your score overall.
If you’re struggling to make payments, are actively working to improve your score, or are barely in the “good” range or above, now might not be the ideal time. Wait until your score has increased a bit more so that you can have a buffer in case the hard inquiry brings you score down a few points.
Did you know that hard inquiries that you did not approve can be removed from your credit report? In fact, unfair negative items can be removed from your report. It’s a right you have as a consumer to dispute them. And while staying on top of these unfair negative items on your credit report can be time consuming, it’s important to do so so that you are not putting your future at risk.
2. What is your current credit utilization ratio?
Your credit utilization ratio is an important little number that makes up 30% of your FICO credit score.
There are actually two types of utilization: line item and aggregate. Line item utilization is the percentage of your credit that you’re using across each individual line of credit. Aggregate, on the other hand, refers to the percentage of your credit you’re using across all of your available credit. A utilization ratio — both line item and aggregate — below 30% will have little impact on your credit score.
If you’re currently above 30%, it could be a smart move to open a new credit card with the intention of not using it. That way you’ll increase your aggregate ratio.
3. Are you making any big purchases like a house or a car in the coming year?
This is mostly because opening a new credit card will put a hard inquiry on your report and can ding your score. This isn’t ideal if you’re trying to get the best interest rate for a car loan or mortgage because that information is calculated by your credit score.
If you’re still a year or two out from one of these big purchases, now might actually be a good time to work on improving your credit score by upping your available credit.
4. Does it have an annual fee?
This could be a huge factor in deciding if this is the right card for you. If you can afford an annual fee and the benefits of the card are worth the fee for you, it might be worth it.
The annual fee needs to be seen as an out of pocket expense, even if the benefits outweigh the cost.
For example, I had a credit card that gets me a companion fare on my favorite airline. The companion fare can be used alongside a full price round-trip ticket for about $99 plus taxes and fees. This card, however, also comes with a $75/annual fee. So even though I might be saving a couple hundred on a second round-trip ticket, my out of pocket cost for that ticket is still around $200 when I factor in the annual fee. It’s still worth it to me because I typically save around $400 off purchasing a second ticket, but it’s still something to consider.
5. Is my credit score high enough?
Because creditors make a hard inquiry on your credit when they look at your report, you’ll want to make sure you can actually be approved for the card.
Creditors will run a credit check on your before they approve your application. By seeing what kind of credit cards and lines of credit, the number, and balances, they can determine whether or not you’ll make your payments. Plus, they’ll check on your outstanding balances to see if you’re carrying debt or not. They can also make sure you have a stable income which will also increase the chances that you’ll be a trustworthy borrower.
Your credit score on its own may not be the only basis for determining a card, but remember that your credit score is made up of factors that determine your trustworthiness as a borrower. If you have a poor score, it would be worth the effort to improve your score before applying.
6. Were you pre-approved?
If you were pre-approved for a card, the creditor isn’t doing a hard inquiry on your report. This is a soft inquiry and won’t show up on your credit report. If you need to open a new card to improve your credit score, this might be a good way to do it.
7. Do you need a new credit card?
“Need” will depend on your current financial situation. Are you:
- behind on payments already existing credit cards?
- consolidating your debt?
- at risk of declaring bankruptcy?
If you answered yes to any of these, consider if you really do need a new card or not. Will opening one only lead you to more consumer debt? If so, it’s probably best to hold off until you can improve your financial situation.
8. Is this the right kind of card for you?
If you’re thinking about opening a new credit card, chances are it’s because you’re looking at the rewards available.
There are many types of credit cards available. From cash back to rewards points to dedicated airlines to points that you can use anywhere, there are a huge plethora of cards available.
Consider what is most valuable to you. Maybe you’re trying to earn enough points to take your family to Hawaii but your main purchases are groceries and gas. A travel rewards card might not be the best fit if you won’t be able to use point multipliers to earn the rewards you seek.
Compare all the types of cards you’re looking at (including the annual fee and interest rates) to determine which is best for you.
Take your time opening a new credit card.
There’s no rush to open a new credit card. First reflect on the reason why you’re interested in opening a new card. Then, do your research on the appropriate card for your financial situation, spending habits, and goals. Most importantly, don’t apply without knowing where you stand with your own credit.
Credit cards aren’t a bad thing. They can be very useful tools in building your credit, if you utilize them appropriately. Take your time with applying and be smart.