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A credit card can give you convenience or a curse depending on your use. It could help you manage your finances, get out of debt faster, or earn excellent rewards.
A credit card is a wonderful financial invention. It provides the holder with superb purchasing power, unequaled convenience, and security – bundled in a small piece of plastic.
The obvious advice is to use your credit card with extreme care to keep yourself free from sizeable financial problems and protect your financial security from coming apart. Credit card issuers make an amount of credit available for the holder to borrow from time to time.
Is It Easy To Get A Credit Card?
Like any finance, getting a credit card will be easy if you have good credit. Most issuers will still look at your debt-to-income ratio and other factors before approval, but it should be straightforward if you have good to excellent credit.
However, you may find the process a little more challenging if you have poor credit. You may need to look for credit card companies specializing in less-than-perfect credit. This will likely mean that you will pay a higher interest rate on balances, and there may be fewer membership perks, such as cashback or points.
1. Apply For a Lot Of Credit Cards or Loans
Why it isn’t good: You’re shopping around for the best card and want to know which issuer will approve you.
We say think it over before filing your application left and right. An analysis of new credit will take up 10 percent of your score, and if there are multiple credit inquiries under your name, it will pull your score down.
It would be best if you were wary about sending out too many credit card applications because it may send out a couple of wrong messages. First, the lender might think that you filed with many issuers, and they denied your application for some reason.
Or, you got a card from several issuers, which means that you desperately need credit – which is a sign of a big financial problem. Every time you apply for credit, the prospective lender will generate a hard inquiry to see if you are creditworthy.
How Does It Affect My Credit?
This inquiry goes into your credit report, and every hard inquiry you get drags down your score. It may be minor, usually three to five points, but it might make the difference between getting a good and bad score.
You reduce the damage when you pay on time with a new card. But take note that if you apply simultaneously for several cards, lenders will consider this a risky behavior.
What we want to say is to apply for new cards strategically. If a lender rejects you, find out why before you try again with a new lender. Be reasonable – a mediocre credit score getting a high-end credit card is just wishful thinking. It would be best if you settled for the card that fits your credit standing or tried to improve your credit to qualify for the card you’re aiming for.
2. High Credit Utilization
Why it’s bad: When you add a line of credit, you automatically decrease your ratio.
If you already have one or more credit cards with outstanding balances, you can help improve your credit score by adding a new card.
Your credit utilization ratio accounts for 30% of your FICO score. This is the proportion of the total amount you owe compared to the credit that’s available for you. To keep your utilization ratio from increasing, you should try to keep your balances low. Here’s the thing: once you pass the 30% mark, your scores will plunge dramatically.
This chart created with Experian data shows that those with an average to good credit score have an average credit utilization ratio of the optimum 33%. This ratio drops significantly for those with very good and excellent scores.
At the other end of the scale, the chart shows that those with poor credit scores typically have a very high credit utilization ratio, with an average of 73%. This will be a massive factor in lending decisions for those in this group.
3. Not Payoff Your Credit in Full
Why it’s bad: Doing this may cause the card issuer to give you a penalty APR which will burden you with considerable cost in additional interest.
You should be aware that the majority of credit cards come with a maximum credit limit.
This is the highest amount that you can spend without incurring any penalty. Your card issuer does not expect you to use up your credit limit to the last cent.
When you max out your credit card, it usually shows you are using credit higher than the amount you are paying off. This situation normally ends up with you making some late payments.
Keep in mind that the card issuer will use the maximum interest they can charge you and they can reach up to 29.99%.
According to LendingTree data, the average APR offered with a new credit card is 22.91%, as of December 2022:
Why Maxing Out Your Credit Card Hurt Your Score?
If you max out your credit card, you open the doors to many negative repercussions. Here are some of the significant negative results:
- Your credit score will go down. We’re not talking about a few measly points here – we’re looking at a 30% drop based on the actual amount of your available credit that you are using. So, the higher you utilize your credit limit, the more your credit score will suffer.
- Your issuer can charge you a penalty APR. Although the penalty may not come automatically as soon as you max out your card, there’s a big chance it will. This is because most card companies will wait until you default for over 60 days before they impose the penalty APR.
- You can’t use your card anymore. When you max out your credit card, you will no longer have an available credit limit to use and, therefore won’t be able to make purchases. This can put you in a tight spot if you’re depending on your card for your day-to-day purchases and have not prepared for this situation.
How To Avoid It?
Here are some things you can do to stop yourself from maxing out your card:
- Build an emergency fund. Set aside a specific sum in a different saving account and use it only for emergencies. When you have an emergency account, you won’t have to rely exclusively on your credit card when you have an emergency.
- Use your card only for necessities. If it’s taking you a long to build an emergency fund, discipline yourself to use your credit card only in case of true exigencies and purchase only the necessities.
- Pay off your card purchases as soon as you can. This is a good habit to develop: pay off your credit card as soon as you make a purchase. Don’t wait for the statement to come – make your payment even before the cut-off date.
4. Don’t Miss Payments
Missing payments or just continuing to build up your credit card balance adversely affects your credit report and credit scores. Banks and lenders are not usually funding borrowers with high credit card debt. In the financial realm, every decision will have a material effect on your credit score.
Your credit score is significant because should you experience a downside to your financial situation, your score could save you financially.
A credit card cash advance may seem inviting and convenient in an emergency when you need cash fast. However, what is essential is to realize that cash advances cost a lot – higher interest rates plus additional fees. This can jack up your outstanding balance faster and make it harder for you to keep up with your monthly payments.
In addition, card issuers typically look at people who get cash advances as probable candidates for default. You can avoid making a cash advance and try to get a small loan from your local financial institutions.
5. Cancel Other Cards
Why it’s bad: When you cancel accounts in good standing with other companies, you effectively shorten your length of credit history on your report and it’s worth 15% of your score.
You will also reduce your total available credit, which would likely increase your debt utilization ratio in case you have high outstanding balances on other credit cards.
Many people often close out the cards they no longer use to lessen the number of cards in their wallet. What they don’t realize is that it can pull down their credit score. Your debt utilization ratio goes up when you close your inactive accounts.
A simple trick is to make a small purchase using the card you don’t use much and then pay it off immediately. This little activity could be enough to register in the card issuer’s system to keep them from automatically closing your account and damaging your credit score.
But if the card that you don’t use often charges you an annual fee or you really want to simplify your card holdings, go on and close it. Just remember to time it well – it’s not wise to close several cards at the same time.
6. Paying Your Mortgage With Your Card
Most of the time, this is not a viable option. This is because mortgage companies don’t encourage borrowers to pay their mortgages through credit cards.
In addition, if you’re already paying interest on your mortgage, why would you want to pay additional interest through your credit card? It’s a costly option that you should avoid. If you use your card this way, you will also increase your credit utilization rate, which could, in turn, lower your credit score.
In reality, a third-party company will have to act as a go-between to allow you to pay the mortgage installments through your card. However, that will cause you to pay much more because these third-party services cost an arm and a leg. If you can pay your mortgage with your high-limit credit card, you’ll be paying a higher interest rate at the end of each month.
Things could become chaotic if you fail to pay down your entire account balance at any time. If ever you find a legitimate way to pay your mortgage with your credit card, it’s still not a good decision if you’re not planning to pay off your total credit card balance every month.
Why was I not approved for a credit card?
There may be a number of reasons why your credit card application was declined. Common reasons include:
- High Debt Balances: If your existing loans and credit cards have high balances, you will have a high debt utilization ratio, which makes lenders reluctant to approve more credit. Aim to keep the balances on your existing accounts at 30% of the credit limits or less to improve your chances of approval.
- Multiple Inquiries: If you’ve submitted numerous applications for credit cards and loans, it is a red flag to potential lenders.
- Recent Delinquencies: If you recently missed a payment on a loan or other bill, it will reduce your chances of approval.
- Limited Credit History: This can be a catch 22, but if you have no credit experience, it can be difficult to get credit. You may need to search for a student or secured credit card, which is likely to have more relaxed requirements.
What is the minimum salary to get a credit card?
There is no set minimum salary requirement to get approval for a credit card application. The income requirements vary by credit card providers and from card to card. Additionally, your salary is just one factor that the lender will consider when assessing your application. So, don’t get too hung up on your salary and instead focus on building good credit.
Can I apply for a credit card after rejection?
While it is possible to apply for another credit card after an application has been rejected, it is not necessarily a good idea. The first application will have triggered a hard pull to be recorded on your credit file and the provider will see this on your next application.
Generally, lenders are hesitant to approve applications when there have been multiple credit inquiries in a short period. So, try to keep applications to a minimum and research your options, so you only apply for credit cards that you have a good chance of getting approval for
Is it better to have a cashback or rewards credit card?
The answer to this question is dependent on your way of life. If you fly regularly, for example, it could be wiser to have a card with miles-based incentives rather than cashback offerings. However, if you plan to charge a major purchase to your credit card, cashback benefits may be preferable because you can put them toward paying down your amount.
Getting cashback incentives for establishments you use frequently, such as gas stations and supermarkets, can help you save money over time. However, you must ensure that you are making transactions at locations that accept your card.
Is it true that if you are denied, your credit score would suffer?
Although being denied permission for a new credit card will not harm your credit score in and of itself, the hard inquiry from the time you submitted the application may. This implies that not only will you be disappointed if you are not authorized, but you should also refrain from applying for new cards until you have waited at least a month or two.