10 Questions to Ask Yourself Before Opening New Credit Cards
Are you considering opening a new credit card? For most people, the idea is both enticing and intimidating. On one hand, you can make larger purchases, accrue rewards, and make payments on outstanding debt. On the other hand, you're faced with fine print, interest rates, and fees that are often confusing. And while credit cards feel like access to wealth, they are actually the number one source of debt. The average American carries $38,000 in debt, with credit cards and mortgages tied as the leading source. Credit cards have the ability to lower your credit score, fuel your college education, and fund a mortgage. But they also have the potential to lower your score, drain your resources, and saddle you with cumbersome debt. Before you say, "yes" to that salesperson promising perks, ask yourself the following questions.
1. Do You Really Need a New Credit Card?
Is this your first credit card? If you are a legal adult living on your own and paying your own bills, it's often a wise decision to open your first card to acquire credit history. But for others who already have credit cards, the choice is much more complex. When a cashier offers to take 30% off your purchase if you open a store credit card, the temptation is real. But, that's why it's important to pause and consider need vs. want. A card's annual fees, interest rates, and credit score deduction can quickly undo the savings on your purchase. The experts at Family Credit Management can help you determine your best credit plan.
2. What are the Annual Fees and Percentage Rate?
Some companies offer an introductory period of lower interest for 6 months or more. But, the regular APR is what you need to determine. Often, you can find that rate in the card's terms and conditions. If not, contact a representative from the company to make sure you won't be blindsided. In addition, some cards carry annual fees that need to be measured against their rewards. For example, if the credit card company offers companion airfare for $100 and a $100 annual fee, you might still come out ahead since many plane tickets exceed $200. But if the fees aren't counterbalanced by more valuable savings, or rewards you will actually use, the fees are just added expense.
3. Where Does Your Credit Utilization Ratio Stand?
Line item and aggregate utilization are two separate things, and the ratio is important. Your line item utilization is the percentage of credit you use on each card, whereas your aggregate utilization covers all lines of credit. If the ratio of the two is below 30%, it might not negatively impact your credit score. Opening a new card if your ratio is above 30% could positively impact your aggregate score, as long as you keep spending low and paid off on your new card. But it's best to consult debt management experts before attempting to change the ratio.
4. Is It the Best Card for You?
Start by determining the credit line you need. If you spend a lot, you might seek a card with high limits, but your credit score will ultimately determine approval. Don't be swayed by promises of rewards if you aren't eligible for that credit level. It's also important to determine long-term advantages to the card. Some companies like Target offer ongoing discounts for shopping in their stores. But, their debit cards come with similar discounts, without accruing annual fees or interest. Each company should be evaluated for difficulty of reward redemption, APR increases over time, and hidden fees. Make sure the rewards are useful to you and can't be retracted.
5. Do You Have Pre-Approval or a High Credit Score?
Creditors make a hard inquiry on your credit when they look at your report, so pre-approval helps you determine if you'll actually be approved for the card. Creditors run a credit check before you are approved that looks at types of credit cards you have, lines of credit, and outstanding balances, as well as stability of your income. Pre-approval prevents the hassle of the inquiry on your credit, only to find out you aren't approved. A high credit score is also essential if you plan to open another card.
6. Can Your Credit Score Handle a Hit?
Since hard inquiries ding your credit score, you want to avoid multiple inquiries in a short span of time. If you have recently opened a different credit card, it's not advisable to open another one quickly due to the dip in your score. If your current score is not "good" or better, you should wait, since the inquiry might drop your score to an undesirable level.
7. How Do You Manage Existing Balances?
Are you behind on payments on existing credit cards? Are you in the process of debt consolidation? Are you at risk of bankruptcy? If so, now is not the time to open a new card. Interest rates on outstanding balances are costly and easily outweigh rewards or discounts. A new card just adds another bill to the stack. Don't open a new card unless you are comfortably paying current card balances in full and on time. If you have credit card debt, get our help here. Family Credit Management will devise a debt management plan to get you back on track.
8. Do You Typically Exceed Your Budget?
For some people, credit cards lead to chronic overspending, especially if the purchases generate rewards. Before you open a new card, practice spending within your current budget. When making purchases with your credit card, make sure you have sufficient funds in your account to cover the total so interest doesn't kick in. Ideally, you want to use the credit card to receive rewards and boost your credit score, without carrying debt or interest fees.
9. Are You In Need of Loans or a Mortgage?
If you need to apply for a loan or a mortgage in the next year, hold off on opening a new card. Since the card application docks your credit score for a few months, it could impact your ability to secure the loan or get the best rate. Conversely, if you don't need to make a large purchase this year, opening a new credit card that you pay off faithfully may improve your score when the time comes to secure lending.
10. How Does the Company Treat its Customers?
Plenty of credit card companies are willing to sign you up, so don't jump at the first chance you get. Pay attention to the customer service practices so you don't end up in a bind. How do they handle fraudulent purchases and how do they monitor that activity? What are the penalties for a missed payment and how do they handle customers in financial hardship? Can rewards be taken away? Can cosigners get out of an agreement? Don't sign up with a credit card company until you truly understand how they treat their customers.
Opening a new credit card might seem like a way to cover your expenses, but, in reality, it's often a step toward growing debt and uncertainty for your financial future. The certified credit counselors at Family Credit Management are here to help. We can devise a plan to maximize your debt consolidation and credit score to secure financial freedom. Contact us today for a free quote!