Applying for credit cards

In my line of work I am always having to explain to people how to properly use their credit cards so as not to negatively affect their credit score. In a future article we will discuss what does and does not affect your credit score. But for this article we are going to discuss how to apply for a credit card and how to properly use them to accellerate your credit score up into the 720's and above. As you are probably aware, those who have a credit score of 720 or greater are considered to be a person who walks on water.

First let us assume that your credit score is not in the "A Paper" range (667 or higher). You are probably inundated daily with junk mail and junk email offers for credit cards. These offers range anywhere from secured cards that require you to maintain a certain balance on your card in order to use it to offers of 0% interest for x numbers of months rising to as much as 29.9% after that period. Some of these are scams and others are legitimate, albeit expensive, offers. Let's first examine the offers that require you to maintain a balance.

It is usually not a wise decision to accept offers of this kind. These offers require you to send in a certain amount of money (let us say for purposes of this article $300) that is the "credit balance" available to you. In other words, if you send them $300 you should have a credit limit of $300, right? WRONG! Most people don't read the fine print on the reverse side of these credit offers. There is usually an account setup fee, a maintenance fee, a membership fee and sometimes (believe it or not) a low balance fee if your credit balance drops below a certain level. This is a scheme they have borrowed from Credit Unions. Usually what happens is that you send in your initial $300 from which they deduct the activation fee, maintenance fee and membership fee. These fees often add up to more than your initial $300. So now you are hit with an over the limit fee and that low balance fee. Now, before you have even had a chance to use your new credit card, you owe them an additional sum of money beyond the $300 you sent in to start the credit line.

No problem, you say. Live and learn. At least I am only out $300 and I will cancel the card and walk away wiser. Remember that fine print? In that fine print that you did not read, there is often a clause which reads that you have to maintain the card with minimum balance for at least one year. And don't forget that you are already over your limit so you have to make up that balance as well as another $300 to maintain your balance. So you say, fine, I will send in the money and just not use the card. When your next monthly statement arrives, you find that you are again below your minimum balance because of the monthly fees. So now you have to send this company money each month to maintain a card that you cannot use. And for a year you are stuck doing this because it is cheaper to do so than it is to hire a lawyer to fight the scandelous fiends. Finally your year is up and you cancel the card expecting your $300 back. You will never see it. It goes to your card cancellation fee which will somehow be exactly whatever the balance remaining is after their monthly fees. Funny how that works, isn't it. I hope you never get caught in a situation like this.

Now let's look at the pros and cons of the legitimate credit card offers. You get a bunch of these also. They say that you can start a line of credit because you are already pre-approved. They will set you up with a line of credit ranging from $300 to $5000. Of course you are interested because $5000 dollars is a lot of money to have available to you. So you fill out the application and a couple of weeks later you receive your new credit card with a $300 line of credit. You are obviously disappointed. The $5000 dollar line was never really available to you. That is just a marketing scheme to get you to apply. Hell, I have fallen for that one myself. But $300 is better than nothing. And chances are that if you are wize and handle your credit correctly, that limit should start to rise in a few years. This is a great place to start to improve your credit standing.
So what is the first thing you do? You go out and buy that $250 widget you have always wanted because you can buy now and pay later. You get your monthly statement and you say, well I will make the minimum payment. This is fine because the credit card company will report you as "paying as agreed" to the credit reporting agencies. This is good, right? WRONG! The moment you go 50 cents over 1/2 of your credit limit, your credit score starts to DROP! Even though you are making your payments on time, every month that you maintain a balance that exceeds 1/2 of your limit, your score goes down. So it is wize to remember to STOP using your credit card when you are at 50 cents BELOW 1/2 of your limit. This will keep your score from dropping and as long as you continue to make your payments on time, your score should rise.
So you opted to get this card because they promised you 0% interest for nine months! This is great! Nine months that I can borrow money for FREE! Now let's look at what happens in month ten. Your interest rate skyrockets to 20%! Now when you make those minimum payments, most of the money is going to interest and very little is going to principle. And if your balance is at or just below 1/2 of your limit, the interest charges can put you over that 1/2 mark and your score starts to drop.

No problem, right. You will just apply for this other credit card that is offering a 0% interest for nine months and transfer the balance. This seems like a reasonable thing to do. Now you have extended the amount of time that you can borrow money for free to 18 months. You pat yourself on the back for your ingenuity, as well you should. So nine months later, you do the same thing again, transfer the balance to card number three. This is so successful that you decide to do it yet again, a fourth time. Then you notice that your credit score drops. Why? Because you have more than three credit cards. This will also cause your credit score to plummet. The reason for this is that it is assumed by the creditors of America that if you have more than three credit cards you are living beyond your means.

You should consider all this as you are applying for credit cards.

1) Are they requiring me to pay for my credit limit? If the answer is yes, then wait until you get an offer from a reputable credit card company such as Capitol One or Discover.
2) What are the anual membership fees? If you are not ok with the amount they are charging for the anual fee, then just wait, another offer will be coming along tomorrow.
3) What is the interest rate after the initial 0% period? It is unlikely that you will get an interest rate of less than 19.9% if your credit score is under 660 so just take what you can get and understand that you are only using this credit card until you can get your score up to "A Paper" rating when you will qualify for the 3-5% interest rates. Remember to cancel your high interest credit cards BEFORE you send in your applications for the low interest cards. This will help prevent a serious drop in your credit rating score.
4) Keep your active credit cards to three or less.
5) When using your credit cards, keep your balance LESS than 1/2 of your credit limit.
6) ALWAYS make your payments on time. And pay more than the minimum whenever you can.

And one last thing to remember: Always pay all of your bills on time, especially the ones that report to the credit bureaus. Credit card companies will periodically check your credit to see if you have any late pays, charge offs, etc. If they see any, they can take any course of action ranging from raising your interest rate to canceling your credit card. This is obviously not the direction you want to take your credit profile.