If you’re in the market for a new credit card in 2020, you may find that the financial impact of the coronavirus pandemic has changed the borrowing landscape.
Some credit card issuers have raised the standards on accepting new customers, and some have lowered credit limits or terminated accounts for existing customers.
And while money expert Clark Howard encourages you to consider adding a new credit card to your wallet during these uncertain economic times, the changes card issuers are making right now could make it harder to get the card you want.
That means you’re going to need to ensure your credit is in top shape before you submit your application. Don’t fret, though. Team Clark is here to help.
As you begin your quest for a new credit card, here are four steps to take before you start the application process:
1. Assess Your Creditworthiness
One of the harsh realities of applying for a credit card during financial hard times is that card issuers are less likely to extend credit to customers with lower credit scores. So when you set out to apply for a new card, you’re going to want to understand how card issuers assess your creditworthiness. That will help you decide which card to apply for.
Step one in that process is gaining access to your latest credit reports for a checkup.
How to Get Your Credit Reports
Here is the step-by-step process for claiming these reports:
- Go to AnnualCreditReport.com
- Click on “Request Your Free Credit Reports”
- Fill out the form, which asks for your personal information
- Confirm your identity with each credit bureau
- After verification, you’ll be forwarded to your credit reports
What Is on Your Credit Report
OK, now you know how to find your credit reports. But what are you looking at once you have them?
There are four types of personal information that you’re going to want to monitor and verify on your credit reports:
- Personal Information: This is the information that you submit to lenders when you apply for credit. They use it to verify that you’re who you say you are. You’ll want to review the spelling of your name, address, Social Security number and employment information to ensure it’s all correct.
- Credit Accounts: This a compilation of reporting from your lenders: things like your payment history on auto loans, mortgages and credit cards. You’ll also find Information here about how long you’ve had each account and whether each account is in good or bad standing.
- Credit Inquiries: This section shows how many times you’ve requested a loan or line of credit. Typically, when you apply a lender will pull your credit report to review your creditworthiness. When you apply for a credit card, this transaction is likely to be added to the list. The number of times a credit inquiry is submitted on your behalf can impact your credit score.
- Public Records and Collections: Credit reports will also include public information such as collections or bankruptcies in your name. These are going to be big red flags for a credit card company, so it probably should go without saying that you’re going to want to avoid poor marks in this area.
You’ll want to make sure that your credit reports accurately reflect your financial situation, personal information and past inquiries. If you find that something is not as it should be, there are steps you can take to dispute your credit report.
2. Evaluate and Improve Your Credit Score
Now that you have accessed your credit reports and know what is on them, you may be wondering how good your credit score is and whether it needs improvement.
These scores, which vary from one credit bureau to the next, are graded on a scale that ranges from 300 to 850. The closer you are to 850, the better. That’s because a score closer to 850 falls into what creditors consider the “excellent” credit bracket.
What is Excellent Credit? And Do You Have It?
“Excellent” credit is sometimes listed as the determining factor for access to the best credit cards on the market.
Each card issuer uses a different methodology for assessing the risk of a new borrower, so their definitions of “excellent credit” can vary.
But there are tools to help understand where your credit score falls on different rating scales. The main one is called a FICO score.
For example, here’s a breakdown of how FICO scores are classified:
FICO Score Scale
- “Exceptional” (800-850): 21% of Americans fall into this category, and are likely eligible for the best credit card offers available.
- “Very Good” (740-799): This is a category that should qualify you for many credit card options at “better than average” rates. 25% of Americans are in this group.
- “Good” (670-739): This is still considered a relatively low-risk group, but people who score at the lower end of this tier may start to feel the impact of economic conditions when applying for a new credit card.
- “Fair” (580-669): A score in this area places you as a “subprime borrower” according to Experian. That means you’re going to have a hard time getting favorable perks or rates from a new credit card and may have trouble getting accepted at all by some issuers.
- “Very Poor” (300-579): If you fall into this category with 16% of Americans, your best route to credit may be through a secured credit card. Team Clark has rated the best secured cards here.
By the FICO definition, you should be looking for a credit score of 800 or better to feel comfortable in your “excellent” credit status.
Capital One Credit Level Guidelines
Capital One, which is one of the major credit card issuers in the United States, produces a four-tier credit guideline chart to help potential applicants.
The chart shows which of the company’s cards are best-suited for applicants according to their creditworthiness.
Here’s a look at the chart from Capital One as an example of how a credit card issuer might classify potential customers:
What’s interesting is that the chart doesn’t actually list any credit score ranges.
That probably serves as a good reminder for consumers that no single credit score is a stand-alone yardstick for a decision from a card issuer.
How To Improve Your Credit Score
To improve your score, you’ll want to consider how the formula is weighted and then adjust your potential financial weaknesses accordingly.
Here’s a look at the rough breakdown for how your credit scores are determined FICO score is determined and some basic tips for improving in each area:
- Payment History (35%): The quick and easy fix here: Make sure you pay all of your bills in full and on time. If there are delinquencies on your account, make every effort to rectify that situation.
- Outstanding Balances (30%): This is the sum of the total amount you owe to creditors. To improve your score in this area, you can simply pay down on loans or outstanding credit card balances. That will drive down your credit utilization rate, which is a big factor for your FICO score.
- Length of Credit History (15%): This one requires time more than anything, so it’s hard to make a quick fix here. Making sure you keep your older credit accounts open and using them actively will help improve your score in this area.
- New Credit (10%): Opening a bunch of new lines of credit in a short period of time is a red flag that you may have a potential financial issue. So take your time and make sure you request credit only when you need it.
- Credit Mix (10%): This is an evaluation of how “well-rounded” you are with your borrowing. You don’t have to go for a “one of this, one of that” approach to game this category, but it’s something to keep in mind if, for example, you have a bunch of personal loans or credit cards.
3. Develop Your Proof of Income
As a part of the credit card application process, you’re almost certainly going to be required to disclose your annual personal income. And in some cases, the credit card issuer may request that you provide proof of that income.
Your latest payroll stubs should provide the necessary information, so it’s a good idea to have copies or quick access to them before you apply for a new credit card.
Credit issuers sometimes require this information to gain a better understanding of your ability to meet your current debt obligations. It can also help them set an appropriate credit limit for you as a new borrower.
4. Pick the Right Credit Card
Once you’re comfortable with your credit reports, credit score and income sourcing, you’re probably ready to apply for a new credit card. But which one should you get?
If you’re anything like me, the options are probably all around you: in your mailbox, on your email account and in advertisements on your phone and computer. Resist the temptation to take the easy route with one of those advertisements and do a little bit of research on the front end to find the one that fits your needs best.
There are cards geared specifically toward things like cash back rewards, travel rewards, store-specific rewards, balance transfers and 0% APR intro periods. If you need to lower your interest on an existing balance, you may look for a balance transfer offer. But if you need to do some short-term spending and carry a balance for a few months, perhaps the 0% introductory offer makes the most sense.
If you’re going the reward card route, money expert Clark Howard suggests a straightforward cash back card.
“My favorite reward cards are ones that actually pay you money. I want cash, because nobody can tell you when you can or can’t spend your cash,” Clark says.
This is especially sound advice amid the COVID-19 pandemic, as reward benefits for things like hotel stays and airline miles seem hard to attain while adhering to health guidelines.
If you’re looking to add a new credit card in 2020, the actionable steps are to:
- Pull your credit reports regularly
- Assess them for any irregularities
- Understand what makes your credit score move and work to improve it
- Work to push your credit toward an “excellent” rating to qualify for the best credit card offers
- Line up your proof of income to ensure you get the proper credit limit
- Pick the right credit card for you based on your financial situation
If you’re able to do this, you’ll be well on your way to a strong credit card decision despite the bleak financial situation that surrounds us all in 2020.