Lucrative sign-up bonuses and competitive rewards programs have certainly reinvigorated consumer interest in credit cards. But these incentives shouldn’t be the only reason you elect to fatten your wallet, especially if you’re prone to overspending.
Instead, ask yourself these nine questions before applying for a new credit card to determine if it will ultimately help or hurt your finances.
1. What is my current financial status?
The first step to figuring out if it’s the right time to take on some new plastic is to assess the current state of your finances. You want to make sure you have enough cash flow to pay off new debts, but remember to be forward-looking.
“Ask ‘is my employment status secure?'” Deatra Riley, financial education manager for non-profit credit counseling organization CredAbility, says. You also should make sure you have both a short-term and long-term plan for saving in place before you take on a payment method that could potentially affect your ability to put money into a bank account.
2. How much do I already owe?
You may instinctively review the balances you’re carrying on existing credit cards before adding new one. However, it’s just as important to make sure you factor in other debts, like home, auto or student loans, before you fill out the application.
“All of those other debts could be the big elephant in the room,” says Bruce McClary, Director of Media Relations for ClearPoint Credit Counseling Solutions, since existing financial obligations can ultimately affect your ability to pay off balances on a new card. Or, conversely, big balances can affect your ability to make monthly payments on your loan. Both of these missteps can do damage to your credit score.
3. Will I be able to pay more than the minimum each month?
Similarly, you shouldn’t be applying for a credit card as a means to make purchases while you’re paying off big bills, since the interest on revolving balances will only increase your debt load.
“Interest rates are higher than we’ve seen in the past,” Riley says. If you carry a balance, you’re going to (literally) pay for it. As such, prospective credit cards applicants probably shouldn’t follow through with the application process if they can only make minimum payments each month. Instead, McClary suggests focusing on your budget in an attempt to find additional savings that can be put towards purchases.
4. Is my credit score in good shape?
Knowing the current status of your credit score is a crucial part of the application process since poor credit scores can cause you to get turned down by a lender. Mediocre scores may earn you the card, but the annual percentage rate (APR) may be sky-high, the credit limit may be too low and the rewards program is probably non-existent.
“A stinky credit score gives you stinky credit card terms,” McClary says. If yours is in rough shape, you may want to hold off on adding some new plastic. Instead, focus on paying down balances and establishing a good payment history on existing loans in an attempt to bolster your score. Once it improves, you’ll be able to qualify for a card with much better terms and conditions.
5. What guidelines does the issuer use in their underwriting?
In order to avoid being turned down, you may want to get a better sense for what an issuer looks at before you apply for a particular product. While the decline itself won’t ding your credit score, the inquiries associated with applying for multiple credit cards (in an effort to actually score one) can add up.
“Do your homework before applying,” Riley says. Most issuers will give you a general sense of whether “good” or “excellent” credit is needed to qualify on their websites or in advertisements. You can also often get a better idea of what their underwriting guidelines are by calling them directly.
6. How many credit cards do I already have?
Multiple inquiries will also have an impact on your credit score when you’re approved for a new card, which is one of the reasons why it’s important to not go overboard and apply for every single sign-on bonus you see. You could also inadvertently lose points for not having an ideal number of credit cards, an aspect of your credit profile that does play a role in FICO’s scoring calculations.
“Opening accounts can actually send your score in the wrong direction,” McClary says. “If you already have five, six, seven or eight credit cards, why on earth do you need another?”
7. How much credit do I need?
You may also want to ask an issuer what credit limit tiers are associated with a particular product (and what the eligibility requirements for each are) since these limits play an important role in credit scoring calculations. Bumping up against a credit limit on both a single card and all of your cards collectively will have negative impact your credit-to-debt utilization ratio. This means cards with very low credit limits can cause problems when you go to charge a big purchase. Cards with exorbitant limits can be equally tricky if they entice you to overspend.
To figure out whether a new card’s limits will best suit your current needs, “look at your credit cards and see what the current percentage you are using,” Riley says. Your ultimate goal is to add a card that will keep your credit utilization under 25% of what is available to you.
8. Why do I want a new card?
This question will certainly reinforce whether your intentions for getting a new card are good. (Hint: If the answer is, “I want to go on a shopping spree,” you should probably skip the application.) It will also help you pinpoint what type of credit card you should ultimately apply for since different card categories are designed to suit specific needs.
For example, if you’re looking to leverage your great credit to get something back on your purchases, you will want to opt for an awesome rewards card, McClary says. On the other hand, if you want a line of credit that can be used in an emergency, you will want to opt for a low-interest credit card. (Rewards cards carry higher APRs to subsidize their points programs.) And, if you’re looking to pay down a high-balance on an existing credit card, you will want to find a card with a great balance transfer offer.
9. What fees are associated with the card?
Annual percentage rates aren’t the only charges associated with a credit card that you need to worry about. Many products also carry annual fees that may put them out of your price range. Some rewards cards, for instance, carry fees of $100 or more as another way to subsidize lucrative points programs that may only prove worthwhile to big spenders.
You’ll also want to read through the terms and conditions associated with credit card to make sure you are aware of other charges that can be incurred, Riley says. For instance, there are often high fees associated with cash advances, late payments, foreign transactions or balance transfers that you’ll want to assess before applying.