Take a look at six of the worst rationalizations for opening a credit card, and learn how to be a prudent plastic user
If you think back to times you’ve opened a new credit card account, can you say with certainty that there was always a good reason?
Sure, cards can be a convenient tool for savvy users who learn to maximize their benefits. They can be near-essential for those building a credit history. But if you’re opening a new account to fund a Hawaii vacation and another to finance a designer bag, those are bad plastic temptations that can haunt you.
The simplest reason? Managing multiple cards takes a lot more diligence, says Peter Nigro, professor and Sarkisian chair in financial services at the Bryant University School of Business. More than that, if your money motivations aren’t pure, you could plunge yourself into debt, which will have all sorts of implications down the road. Take a look at six of the worst rationalizations for opening a credit card, and learn how to be a prudent plastic user.
1. Because your other card is almost maxed out.
Sometimes, the fear of not having access to any credit in the case of an emergency is what prompts people to apply for additional cards. However, if you’re already struggling with a high credit utilization ratio, meaning you are using up a large percentage of your available credit lines, you’re already treading water.
“The closer to your credit limit you get, the worse your credit score is going to get,” explains Bruce McClary, spokesman for the National Foundation for Credit Counseling, a nonprofit financial counseling organization. Say you run up 90 percent of your limit and then want to open an empty line of credit for some wiggle room. Since you’ve already done damage to your score, you are probably not going to get a good interest rate as you’ll be perceived as a risky customer.
Stop and think: Would you lend someone money if you knew they already owed someone else a debt? By asking for more credit, you will probably damage your credit standing, assuming you even qualify. “Gaining access to too much credit over a short period of time is going to impact your credit score negatively,” says Nigro, “as will accumulating more debt onto what you already have.” Instead, focus your energy on paying down your existing balances, says McClary.
It’s not always easy to tell the state of your credit based on an approved or declined request for a credit card.
|— Randy Hopper|
Navy Federal Credit Union
2. Applying just to see if you’re creditworthy.
“It’s not always easy to tell the state of your credit based on an approved or declined request for a credit card,” says Randy Hopper, vice president of credit cards for Navy Federal Credit Union. That’s because credit score requirements vary substantially by issuer and card type, he explains. Not to mention that opening additional lines of credit just to satisfy your curiosity is hardly the best way to check your credit status.
Furthermore, don’t forget — your credit score is impacted by every hard inquiry, meaning you’ll experience a slight drop every time you apply for a new credit card.
3. Because “they offered you one, so you might as well.”
Sometimes people, especially those new to credit, feel flattered and even entitled by creditors sending along so many great offers.
“The companies offering you a line of credit are competing for your business,” says McClary. “That doesn’t mean it’s a good idea to open an account with all of them. The best judge of your creditworthiness is you,” he says. In other words, you have to live with the responsibility and potential consequences of having access to more credit.
It’s also important to read the fine print before you jump on an offer, says Nigro. “Many creditors offer teaser rates that are good for six months, or sometimes they waive an annual fee for the first year, but then have a fee the next year. Others try to suck you into 0-percent transfer balances, but again, there are fees associated,” he says.
Stop and think: How are you managing your finances at this moment? If you’re living paycheck to paycheck, it might not be the best time to add another card to your repertoire.
4. Getting a new card to get you through a rough patch.
Whether you’re anticipating a layoff or paying for a large health care expense, it’s wise to explore options outside of credit cards to weather tight financial times, says Hopper. Instead of simply taking on more debt to fund necessary expenses, consider finding ways to reduce monthly bills, such as consolidating your debts to a lower interest rate, he suggests. If you have time to plan and save, building up an emergency fund will better serve you in the event of a financial mishap or catastrophe.
Stop and think: Is your bank or creditor willing to help? Some financial institutions will work with you if a hardship occurs, but you won’t know unless you ask. Others, such as Navy Federal, offer free financial and credit counseling, says Hopper, so don’t feel like you must go it alone.
Gaining access to too much credit over a short period of time is going to impact your credit score negatively, as will accumulating more debt onto what you already have.
|— Peter Nigro|
Bryant University School of Business
5. To gain access to a very specific rewards program.
When considering those dangling carrots (say, a free trip on a domestic airline), keep in mind that some rewards are not always easy to redeem, says McClary. “If you’re a frequent traveler and are pretty sure you’re going to use that benefit, it could make sense, but you have to have a good handle on your personal finances,” he says. Often, it’s required that you charge a large amount of money in a small window of time to qualify, and you’ll need to have the discipline and the funds to pay that back in full. Also, having multiple reward program cards can be difficult to manage, and you could end up losing out on point-earning opportunities, or worse — become so overwhelmed that you’re late on your payments.
]Stop and think: Can you take advantage of this card’s perks without incurring further debt, and is it a reward that will benefit you in the long run? Also, before you sign up with a new creditor, you should look into the cards you currently carry for rewards programs you might not be using, says Leslie Tayne, an attorney specializing in debt relief and author of the forthcoming book “Life & Debt.” “Call up your current card and ask what point programs are available. They might be able to put you into a program, like cash back,” she says.
6. So you can buy that big-ticket item you’ve been eyeing, but can’t seem to save up for.
We’ve all found ourselves swept into the buy now, pay later mindset, but it can backfire without proper planning. “If you don’t have the money when it comes time to pay later, and you don’t budget for the added bill, it will perpetuate debt,” says Tayne.
Where people get tripped up, she says, is speculating how much money they’ll have in the future. Rationalizing by saying “I should be in a better job by then” or “I should have less expenses next year” is risky. “Figure out what it is that you can afford now,” says Tayne.
Stop and think: Before you take on another card — especially to fund a big purchase — write out a list of your other debt obligations, and figure out how adding to that will impact your monthly budget. “When you look at it on paper,” says Tayne, “there’s a little more of a reality check.”