Since the credit crunch in the midst of the latest recession, credit card solicitations have seen a significant increase. Unless you’ve opted out, and good luck with that, you’re probably getting junk mail from credit card issuers with invitations to apply for the latest credit card offers.
Don’t get too excited, especially if you have bad credit and are seeing these invitations for the first time. The letter might say you’re pre-approved, but all that means is that you are pre-approved to apply. It’s highly rare that an issuer will run your credit and then send you an invitation to apply. In fact, it’s nearly impossible.
Even if you’re at a bank branch like Wells Fargo and Chase, they could be looking at your account on their computer, and they’ll “notice” you can apply for a new credit card. Even in this case, you need to go through an approval process and could be declined if your credit score isn’t high enough.
Before you waste your time, even if you have good credit, ask yourself these questions before applying for a new credit card.
1. Do I already have enough credit available?
If you already have credit cards, add up your limits. You may all ready have all the credit you need, and if you manage your credit wisely across those cards, you may not need another card.
That being said, having — but not using — more available credit can increase your credit score. Your credit utilization ratio will be more favorable if you maintain the same level of balances on your cards overall while increasing available credit. The same effect, however, can be accomplished by negotiating a higher credit limit with one of your existing cards.
And that approach may be better, because when you do apply for a new credit card, you allow the issuer to do a “hard pull” on your credit, which may negatively affect your credit score. Asking for a higher credit limit on an existing card may also initiate a hard pull, but there’s a chance that it won’t.
Here’s what Capital One says about the process of asking for a credit limit increase:
When you request a credit line increase online or in our automated phone system, our review to determine your eligibility will not impact your credit score. To check your eligibility for an increase, we use the information that we normally receive from the credit bureaus each month. This does not generate an additional inquiry.
If you are unsure, call customer service before requesting an increase.
2. How is my credit score?
It’s a good idea to know two things before you apply for a credit card offer. First, know whether the card is targeted to consumers with excellent credit, good credit, or bad credit. Additionally, know the category in which your credit scores place you. In some cases, if you apply for a card for consumers with excellent credit but you do not have a high enough credit score, the issuer will offer a different version of the card to you, with different interest rates, a low credit limit, or reduced benefits.
In looking at a credit card application recently, I saw a declaimer that explained that the application’s terms pertained to the Visa Signature version of the card, a variety of the card with the most benefits. If the application were not to be approved for the Visa Signature version, the issuer might offer a regular Visa.
The issuers see this “bait and switch” as a better alternative than flatly declining the application, because this way the issuer can steer the customer into a credit card product that is priced according to the customer’s risk category.
Check your credit score before applying for new credit, so you don’t face any surprises. I just use Credit Karma to check my scores from TransUnion and Equifax. This may not be exactly the same score the banks use — usually a FICO score from one of the three credit bureaus — but the exact number isn’t as important as the range. If you check all of your credit reports on a regular basis, and all reports are generally the same, your different scores shouldn’t have much variation.
3. Am I highly disciplined with my spending?
On average, consumers tend to spend more with plastic in their wallet or more electronically than with cash. This is a subconscious effect, so you may not even be aware that it is happening. So unless you are in the habit of conscious spending and tracking your expenses, you may find a new credit card will cause you financial distress in the long run.
Credit cards with rewards are best for people who pay off their entire credit card bill on time every month. If you are disciplined, you might be able to make those cash back rewards or airline miles work for you. Or you may benefit from growing a credit profile with a secured credit card, but again, only with disciplined spending habits.
4. Are the rewards affecting my decision?
Cash back rewards can be a dangerous incentive, and many people believe they have the “hacking skills” necessary to maximize their profits from cards. I’ve used cash back credit cards for a long time while tracking my spending, and I’ve switched to an airline miles card for my primary spending, but I’m not an expert rewards hacker. I don’t spend the effort to buy cash-like products to accrue a large amount of benefits without really spending money.
Credit card issuers know how a small percentage of people use back doors. For the most part, they allow it, but every once in a while, they cut benefits or change the rules, usually without any notice to consumers, and people need to change their approach. Once again, this is a legal bait-and-switch tactic. Entice and attract customers with rewards, and change the value or operation of those rewards at a later date — while the consumer continues using the card as much as possible (generating income for the issuers) to reap what little rewards the issuers offer.
5. Am I desperate?
If you have bad credit, living a middle class life can be frustrating. You’ll have difficulty buying a car without saving up first, and if you want that car to be reliable, you’ll need a lot of money.
You will have difficulty buying a home because purchasing a house without a mortgage is largely unthinkable, especially if you need a house that fits a family. It can be done, of course, usually after years of saving, but that needs to be weighed against quality of life issues.
One reason to apply for a credit card, specifically a secured credit card, is to build a good credit history. It’s easier to qualify for a secured credit card, and if you have bad credit, it’s probably your only option. Many times, secured cards, especially those that are offered through “pre-approved” application mailings, come with annual fees and high interest rates.
That’s the world people with bad credit live in, even if their bad credit is due to no fault of their own, like a deadbeat ex-spouse, a parent who used your name and Social Security number without your knowledge, or an accident not covered by insurance. I’ve had friends with personal experience in all three cases.
Being approved for the right card, and operating that credit card with good behavior like spending only what you can afford to pay off from savings within a month, can help get you on the path for solid financial footing in the future.
Do not apply for a new credit card without self-reflection that involves the above five questions. Credit cards are tools that can help you financially, but if you don’t consider the consequences and how you fit in the relationship between issuer and consumer, you could end up damaging your future in a short amount of time.
It could take the rest of your life to recover from bad financial mistakes involving too much credit, if you recover at all.