While many shoppers are planning to use cash or a debit card this holiday season, some will still find they need to apply for new credit. I know many at Wallet Pop will tell you that you should just spend less, but just in case you do decide to apply for credit, do it wisely. You also may find it harder to get.
"Shopping and applying for cards isn't as easy as it used to be," Bill Hardekopf, CEO of Lowcards.com and author of The Credit Card Guidebook, told me by e-mail interview. "Consumers should now expect higher rates and lower credit limits. Approval is no longer a sure thing."
If you still want to apply for a new credit card, here are a few tips to think about first:
1. Start with your credit score. Lenders make their judgment about your credit worthiness based on your credit score. A FICO score of 700 or more is considered very good; over 760 will usually qualify you for the best rates (which is up from 720 several years ago).
If your credit score is less than 640, you'll probably land a high interest rate and limited credit options. Your credit score will also be used to determine the features of your card, such as the credit limit and balance transfer terms. If you're surprised by your credit score, check it for errors. Correcting mistakes is the fastest way to raise a credit score.
2. Before you get a credit card, be sure you know how you'll pay off the credit card. You need to take a hard look at your financial habits to determine what kind of credit card customer you are. Will you pay off the entire balance each month on time, or will you carry a balance? Knowing the answer will help you determine the type of card you need.
If you plan to pay off your balance each month, then pay close attention to the rewards offered. The best type of rewards cards out there are those with no annual fee and cash back rewards. Rewards are skimpier than in previous years, so expect a 1% cash back reward rather than 2% or higher.
You may also find there are reward tiers based on your spending level. If you carry a balance most months, than apply for a card with the lowest possible rate. The less you pay for interest, the more you can pay toward your balance and the faster you can pay off that card. Whatever you do, do not pay a higher rate just to get rewards.
3. Transfer your balance to a card with a lower rate. It used to be easy to get a low teaser rate for a year so you could transfer your balances, especially when 0% balance transfer were common. People even used this tactic to make money. But issuers lost money on the deal, and 0% interest transfers for 12 months are nearly impossible to find unless you have a credit score that's over 760.
Balance transfer fees have also jumped from 3% to 4% and in some cases even 5%, so don't expect to play the transfer game as easily as you once did. If you're thinking of doing a balance transfer or applying for a new card to get a balance transfer, Hardekopf has a recommendation: "Before you begin the process of transferring your balance to another card, contact your issuer and ask them to lower your current rate. This doesn't happen as often as it used to, but it doesn't hurt to ask."
4. Pick one card and apply for it. Compare three or four cards by studying the terms and conditions of these cards. Then select the best one and submit an application. "Limit the number of applications you submit because each application is recorded as a credit inquiry on your credit report," Hardekopf informed us. "Multiple applications are a red flag that can lower your credit score because people actively seeking credit are typically a higher risk to lenders than people who are not seeking credit."
5. Avoid store cards. Don't apply for a store card just because the store gives you an immediate discount on your purchase. The rates are usually much higher than an average card, and if you don't pay off the balance in full the first month, you could pay much more in interest than the money you saved.
6. Pay attention to your rate. Most rates are now variable, and they'll increase in the future as the Federal Reserve raises the prime rate.
The bottom line is, only apply for credit if you really need it. Think about others ways you can work with your existing cards before seeking new credit. Most consumers carry too many credit cards which only lead to further temptations to spend.
Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."
Tips for applying for a new credit card