Have you ever thought about applying for a credit card, say to earn bonus rewards or perhaps to help pay off debt? It seems like a good idea, but did you know that it could hurt your credit score? Here are a few things you should do before sending that credit application through.
Step 1: Research the implications of applying for a credit card
There are a few things to keep in mind when it comes to credit. The first and most important is to research the implications of applying for a credit card. This means understanding the interest rates, fees, and other terms and conditions associated with the card. Doing your homework will help you avoid costly mistakes down the road like accruing debt and needing a credit card snowball calculator to help you dig your way out of it.
You also need to keep in mind your credit score. Your credit score is a measure of your creditworthiness and can impact your ability to get approved for a loan, rent an apartment, or even get a job in banking or with high-level government agencies. One factor affecting your credit score is what’s known as the Number of Inquiries (or “Hard Pulls”).
The more inquiries you have on your report, the lower your score will be because the inquiry process is how the credit bureaus determine if you’re a risk to lend to. If you have a high number of hard pulls, your credit score will be lower, and lenders will be more likely to view you as a risk as a result.
Step 2: Understand how credit cards work
Credit cards are a popular way to borrow money. When you use a credit card, the credit card company pays the vendor (store, restaurant, etc.) for the purchase. The credit card company then credits your account with the purchase amount.
When those charges hit your account, it’s important to pay them off on time. On-time payments are one of the most important factors influencing your credit score. Credit utilization is another one of the most heavily weighted factors that affect your credit score. You should have a ratio of credit used to credit available of no higher than 20%, though the best scores generally have rates of 10% or lower.
Step 3: Compare credit cards
When you’re considering which credit card to apply for, compare the benefits and costs of each option. This step is essential because different cards have different terms and rates, which can impact your credit score.
For example, a card with a low annual fee might be a good option if you’re looking to build your credit score, but it might have higher interest rates than a card with a higher annual fee. You also want to make sure the card has good rewards programs so you can earn money when you use it.
If you’re not sure which card to apply for, ask your financial advisor or read online reviews of different cards. You can also visit the main sites of major banks or credit card companies to see which promotional offers are currently available.
The bottom line
Applying for a credit card can be risky, and a denial can make your financial situation even worse. Make sure you understand the impact it’ll have on your credit score before you apply!