Though some people regard credit cards as nothing more than an invitation to overspend and get into debt, when used correctly, credit cards can be a valuable financial-management tool. Furthermore, credit cards offer certain benefits that cash simply can't mimic, such as built-in rewards, purchase protection, and the ability to snag the best possible prices on the items you buy.
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If you're looking to get a credit card, whether it's for the first time or after several years of poor credit, you may be wondering how to go about the process. Here are a few things you should know. First, your credit history and utilization, or level of debt, will dictate your credit score, and the better that score, the greater your chances of being approved. Additionally, the more income you can show, the more likely you are to get the card of your choice. Finally, not all credit cards are created equal, so you'll probably want one with the lowest possible fees and best rewards. Here, we'll review the process of getting a credit card so that you go in fully prepared.
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Step 1: Know your credit score
Having good credit is key when you're applying for a credit card, and knowing your score can help you determine your likelihood of getting approved. Here's how Experian, one of the three major credit bureaus, categorizes different credit score ranges:
DATA SOURCE: EXPERIAN.
Once you figure out what your score is, you can use those classifications to gauge your likelihood of getting approved for the card of your choice. If, for example, your credit is excellent, you might consider applying for one of the cards on this list.
If your score isn't stellar, you can, and should, take steps to improve it before applying for a credit card. Boosting your credit score is often a matter of paying some bills on time to establish a solid payment history, and reducing your debt to improve your credit utilization ratio, or the extent to which you're using your available credit. A credit utilization ratio that exceeds 30% can hurt you, but if your total available credit is $5,000 and your current balance is $2,000, knocking out just $500 of that debt can work wonders for your score.
Step 2: Get a job
While your income doesn't play a role in determining your credit score, it doesaffect your ability to get approved for a credit card. Credit card issuers like to make sure of two things before giving out accounts -- that you're a reasonably trustworthy borrower, and that you have the means to pay your bills. In fact, a big part of the credit card approval process involves examining your debt-to-income ratio, which is taken by dividing your total recurring debts by your gross income. If, for example, your total monthly debt equals $2,000, and your gross monthly income equals $5,000, your debt-to-income ratio will be 40%. The lower your debt-to-income ratio, the better your chances of getting approved for a credit card.
Step 3: Find the right credit card
Putting yourself in a good position to get approved for a credit card is only half the battle. Once that's out of the way, you'll need to find the ideal card to apply for. Assuming you're eligible for some of the best offers out there, you'll need to decide what rewards and features are most important to you. If you're big on exploring the globe, you might think about getting a travel card, which typically means you won't face foreign transaction fees for purchases made abroad. On the other hand, if your goal is to get your hands on the maximum amount of cash back, you may want to look at some of the cards on this list.
Now if your credit score isn't great or your debt-to-income ratio is higher than average, you may have fewer options as far as credit cards go, but if you have an established relationship with a bank, you can try applying for a card that way. Your bank may be willing to extend a modest line of credit if you have a history of handling your account responsibly.
While it's important to evaluate the perks different credit cards offer, it's equally critical to look at the fees they charge. Some cards, for example, impose an annual fee off the bat, while others charge for things like balance transfers and cash advances. Reviewing these fees before you apply might help you avoid hefty charges down the line.
Finally, once you apply for your new credit card, be sure to read up on how to use it responsibly. Credit cards offer a host of benefits, but if you're not careful, yours could just as easily end up getting you into trouble.
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