If your credit is strong, but your income is low, you may be approved for a card with a low credit limit.
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Tony Mecia is a business journalist who writes for a number of trade and general-interest publications. Every week, he answers readers’ questions about credit card rewards programs in his “Cashing In” column.
I have excellent credit, but my income is low compared to all my expenses. Would I even qualify for a rewards credit card?
Banks consider several factors when deciding whether to approve new customers, and your experience handling debt is key. If a card issuer considers your credit is strong, but your income low, they may approve your card application but offer a lower credit limit than they would extend to another applicant with higher income.
Dear Cashing In,
I’ve been hoping to get a rewards card for many years to basically use as a debit card, paying it off immediately after my purchases.
I’m finally in a position to do so and started researching which cards I might want to apply for, as I now have credit scores in the “excellent” range.
However, I have a mortgage with my fiance. He pays it, I work part-time, and I also have a monthly distribution from investments that cover around half of our mortgage.
I make enough to pay my own bills, but when you take the mortgage into consideration, it looks as if I’m in the negative. I do have a second job, but I don’t make enough to claim that income on taxes.
I’m wondering if I should bother trying to apply for a rewards card.
I’ve asked around and some have said, “No, don’t hurt your credit.” Others have said, “With scores like that, they won’t turn you down!” So, I’d be grateful for other opinions. – Elizabeth
First, congratulations on working hard to improve your credit. That is an important accomplishment, and one that can save you money in the form of better interest rates. It also gives you more credit card options.
Your idea to apply for a rewards credit card and to pay it off in full every month is a wise move. It does not make sense to have a rewards card if you fail to pay it off in full every month.
That’s because the late charges and interest fees are so punishing that they negate the value of any rewards you might receive.
If you have to carry a balance, you are better off finding a card with a lower interest rate and waiting to dabble in rewards cards until your finances are more in order.
How banks evaluate credit card applications
Part of your worry seems to stem from the concern that the amount of income you would list on a credit card application might not look as though it is enough to cover your monthly expenses. To address this, we need to consider how banks evaluate applications for credit cards.
- Banks look primarily at your experience handling credit, because that tends to be a good gauge of how you will handle credit in the future.
- They look at factors such as your debt level, how your debt compares to your available credit, your history of repaying debts, and so on.
- If you have shown yourself to be a responsible borrower, they will generally approve you for a credit card.
Typically, most reward cards require “excellent” credit, which is usually defined as a credit score of 750 or above. Experian says only about 30 percent of Americans have credit scores in that range.
If you have excellent credit, your odds of being approved are good, even if your stated income appears to be less than your monthly expenses. Banks don’t see all of your expenses, so they don’t know if your income can adequately cover them or not.
They also are not necessarily looking for customers who can pay their bills in full each month, since they make tidy profits on those late fees and interest charges.
If they believe your credit is strong, but your income is low, they have the option of approving you but giving you a lower credit limit than they would offer somebody with higher income.
On your application, not only can you include all income that is available to you to pay bills but also investment income and income from a part-time or second job. Thanks to a regulation issued by the Consumer Financial Protection Bureau in 2013, you can also claim your fiance’s income as part of the household income on your credit card application.
Combined with your credit score, a higher income should improve your odds of approval for a rewards credit card.
See related: What is a good credit score?
The real effect of applying for a credit card on your credit
As for the worry that your credit will suffer if you apply for a card, those concerns are often exaggerated.
It is true that applying for a credit card usually causes a drop of a few points in your credit score due to the hard inquiry on your credit. After a year, those lost points are restored as the hard inquiry’s impact falls off.
Applying for multiple cards in a short period of time can, however, have a greater effect on your credit, especially if those applications are denied. Applying for too much credit can be a sign that the applicant is in financial distress.
But if it is just a single application and you continue managing your money well, your credit will recover quickly, certainly within a few months. Applying for credit and managing it wisely can actually help your credit score in the long run.
My advice would be to go ahead and apply for a rewards card you’re most likely to be approved for – so study your options thoroughly before applying.
And remember: Apply for a credit card only if you are certain you can pay off the monthly bill in full and on time.
With excellent credit, you are likely to be approved. Good luck!