10 things NOT to do when you apply for a credit card
Do one of these things could hurt your credit; we tell you how badly
|CREDIT DAMAGE GAUGE
Yellow = Mild impact, i.e. a higher rate or lower limit on a new card
As with any loan, applying for a credit card involves preparation, especially if your credit history is less than sparkling. But a few activities—some of them not obvious—can hurt your chances of getting approved for that new plastic.
If you're looking for a card, the best thing you can do to increase your chances is to pull your credit report, review it for accuracy and analyze the data to make sure you're in the best possible financial standing.
The worst moves you can make to spoil your chances of getting a credit card? Lenders and financial counselors shared 10 things NOT to do when applying for a new line of credit:
To further illustrate the potential impact of these actions, we've add a credit damage gauge, which shows how much each mistake may hurt your application for new credit and your score in the future.
1. Let your credit score slip.
Why it hurts you: Credit card companies look at your score to make their ultimate decision on whether you get a card.
Gone are the days when credit card companies offer credit to any low-score applicant. You may be denied a credit card based on your score.
To find out where you stand, you can purchase your score from one of the three big credit bureaus (Equifax, Experian and TransUnion) for about $20 each at myFICO.com. Or you can register with mycreditcards.com to pull your VantageScore for free, which is the other big credit scoring company. Know that checking your credit score or credit report does not count against you.
Lenders differ widely on their cutoff points. How can people find out the credit score requirements of a company prior to applying for a credit card?
"They cannot, since credit card companies don't reveal this information," said Ray Williams, president of Greenway Capital Management in Fort Worth, Texas. Although more issuers, such as Capital One, are offering prequalification tools that review your credit to see if you are prequalified for certain card products.
"Therefore, it's best for consumers to understand how to determine if they are a good candidate by only applying if they have credit scores above 650 for most credit card companies. Some will allow 620, but with higher interest rates," says Williams.
Stuck with a low score? Consider applying for a secured credit card, which requires cash collateral, to help you build your score in the meantime.
2. Apply for a lot of credit cards or loans.
Why it hurts you: Maybe you're interested in shopping around for the best deal and want to see who will approve you for a card. But think twice before going on a mass application spree. An analysis of your new credit makes up 10 percent of your score, and multiple credit inquiries drag down that score.
"You don't want to go out and apply for a bunch of different accounts," said Bruce McClary, vice president of public relations and external affairs for the National Foundation for Credit Counseling and a former consumer credit counselor. "It may send a couple of messages. First, it tells the lender that you went to a bunch of places and got denied for some reason. Or the possibility exists that you opened an account in each of those places,” which can signal financial problems.
Either way, each time you apply for credit, a hard inquiry is generated on your credit report when a lender checks to see if you are creditworthy. Each hard inquiry drags down your score. When you apply for multiple cards at once, lenders view this as risky behavior. Instead, apply sparingly. If you get rejected, wait six months until you try again.
A small amount of deal shopping is no big problem when it comes to home or car loans, however. Scoring models understand that those looking for a loan will often consider several different lenders within a certain window of time. Confine your mortgage or car loan shopping to a brief period -- say, a month. The credit scoring algorithms view that as routine comparison shopping and don't ding you as much for it.
3. Use too much credit.
Why it hurts you: Your credit utilization ratio accounts for 30 percent of your credit score. If you're close to maxing out your accounts, you're considered a high risk to credit card companies.
"For any existing credit cards you have, you want to minimize percentage utilization and maximize credit available," said Kevin Gallegos, vice president of Phoenix sales and operations at Freedom Debt Relief in Tempe, Arizona. "If you have a credit card with a limit of $10,000, and you owe $3,500 on it, that's a 35 percent utilization." The less you use, the better. Those with the best credit scores on average use less than 35 percent of their credit limits. Anything above that amount is considered high and can negatively impact credit scores, and thereby decrease your chances of getting approved for another card. Use more than 50 percent of your limit will have a definite negative impact on a credit score, and a maxed-out card never looks good.
4. Miss a payment.
Why it hurts you: Paying on time accounts for the biggest chunk of your credit score, weighing in at 35 percent.
Patrick Nichols, a database analyst from Boston, learned this lesson the hard way when he missed a payment deadline by just two hours. "I went from paying [an interest rate of] 0 percent to 30 percent overnight," he said.
Nichols started shopping around for other cards to transfer his balance and came up short on offers. Not only did he have the late payment on his record, he also had a high balance and was starting to rack up multiple inquiries. He found he was limited only to cards with higher interest rates.
"On-time payments are the most important factor in developing good credit," said Gallegos. "Paying bills on time for as little as one month can raise a modest credit score by 20 points."
5. Have too many subprime loans on your report.
Why it hurts you: If there are too many subprime lenders represented in your "credit mix," (which accounts for 10 percent of your score), it could cause credit card companies to think twice about giving you a card.
Lenders "look at what types of creditors you are doing business with, and some of them take issue with applicants who come in with a portfolio of subprime lenders," said McClary.
Subprime lenders are companies who market financial products to people with bad credit. Subprime products tend to carry much higher interest rates to offset higher risk customers.
How much does this affect your credit? "It's all about proportion," McClary said. "If 90 percent of your creditors are prime creditors and you have this one subprime account, it's going to be like a pebble in an ocean.” On the other hand, if you've got numerous high-interest accounts, that could potentially be a problem, he says.
6. Cancel your other cards.
Why it hurts you: Canceling accounts in good standing with other companies can appear to shorten your length of credit history on your report (15 percent of your score) and can also reduce your total available credit, which could drive up your debt utilization ratio if you’re carrying big balances on other cards.
People are often tempted to close out accounts they no longer use, just to keep things simple. But doing so can have a negative effect on your credit score.
"If you shut down a bunch of accounts at the same time, that starts cutting away at another piece of the pie for your credit score, which is the length of your credit history," said McClary. "Plus, your debt ratio worsens when you shut down inactive accounts."
It might be a good idea to make a small purchase -- a pack of gum or a magazine, perhaps -- on a card you don’t use much and then pay it off. That little activity could be enough to keep the card issuer from shutting your account down and damaging your credit without you knowing about it.
However, if a card you rarely use charges an annual fee or if you just need to simplify your card holdings, go ahead and close the card and take the credit score hit. Just don’t close multiple cards at once, try to keep your oldest account open and pay down any high balances on other cards before you do so. Your score should recover over time with good payment behavior and low credit utilization with any remaining cards.
7. Fail to check your credit report for errors.
Why it hurts you: A case of mistaken identity on your credit report could potentially mean that there are items on your report that belong to other people.
The problem can be a simple as having a too-common name or a name that frequently gets misspelled. OK, so there's not a lot you can do if your name is "John Smith." Still, you should be aware that your common name can make you more prone to mistaken identity when it comes to your credit report, which in turn could make it more difficult for you to secure a card. According to a February 2013 report by the Federal Trade Commission, one in four Americans have mistakes in their credit reports big enough to affect their credit scores. The good news is that credit report errors can be disputed and fixed -- though it requires diligence and often more than a simple call or Web visit to the three major consumer credit bureaus: Experian, Equifax and TransUnion.
Some mistakes are easy, but nagging. For Revvell Revati, a natural health practitioner in Altadena, California, credit card companies often misspell her first name with a W instead of two Vs.
"It's an ongoing problem," she said. "I recently attempted to get a credit card and was turned down. I've been accused of fraud."
If you suspect that the problem is more serious, for example, if another person is trying to steal your identity and open accounts in your name, you may want to consider putting a freeze on your credit. That protects you from anybody opening any new accounts in your name.
People with common names or misspelled names should also frequently review their credit reports and consider investing in credit monitoring services. You can review your credit reports for free once a year from each of the big three credit bureaus at annualcreditreport.com.
8. Avoid credit altogether.
Why it hurts you: You need a healthy, active credit history in order for credit card companies to consider you for a loan.
"Don't try to protect things by not borrowing anything," said Gallegos. "Credit card issuers and credit reporting agencies rely on past payment history to gauge how borrowers will do in the future. If you don't borrow, they have no information to rely on. For those without any credit cards, a student loan or car loan helps build a credit history, as does paying every single bill on time and in full. That includes rent, phone, Internet and utility bills."
9. Co-sign a loan for someone who is financially reckless.
Why it hurts you: When you co-sign, you take responsibility for the other person's credit decisions -- good or bad.
By co-signing, you will be held responsible for loan repayment if the primary loan holder starts missing payments. And unless you and the person you co-signed for are communicating about the lapsed payments, you might not even know the loan is delinquent. Lenders won’t generally contact co-signers until the account is 90 days late, and by that time, a late payment (or two) may be already appear on your credit report, which will hurt your score.
The solution is to make sure that when you co-sign for someone, the bills are mailed to you, so you can keep track of the person's payments on the loan, he said. Financial experts advise, however, that you avoid co-signing as a 2016 CreditCards.com poll revealed that four in 10 co-signers end up losing money and 28 percent suffered credit score damage.
10. Lying about your income.
Why it hurts you: Lying on a credit application is fraud, and you could be penalized for it.
While inflating your income on a credit card application may seem like an easy way to boost your odds of approval, it’s not worth the risk. Even slightly exaggerating your income could lead to prosecution under federal bank fraud statutes and could cost you up to 30 years in prison and a fine up to $1 million.
Additionally, the Credit CARD Act of 2009 requires issuers to weigh applicants' abilities to pay their credit card bills, which means they’ll need to know how much income you bring in. If you bloat that number, you’re essentially lying about how much debt you can afford to carry and pay down. It’s in your best interest to be honest and accept that the credit you get is the credit lenders think you deserve.
Updated: October 26, 2016
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