Obtaining Credit

Thinking of applying for a new credit card?  At Save the Bucks we consider a credit card a Best Interest Basic or BIB, that when used responsibly, can reap some highly beneficial rewards.

Here are some tips based on where you are in your credit journey that will help you stay on the up-and-up when it comes to credit:

New to Credit – Know the Formula

When getting your first card, it is important to know that responsible use will make all the difference in your ability to obtain the financial products that you need. By using your credit card responsibly, you will develop a credit score that will alert creditors of your ability to handle an account responsibly. The most frequently used credit score being the FICO® which ranges from a low score of 300 (one that would need some serious improvement), all the way up to a squeaky-clean score of 850. Your FICO® score is made up of several factors of various weight that are considered when you apply for any type of credit, including a credit card, student loan, or mortgage.

35%—Payment history—How often your pay off your bills on time, and the number of times you have ever been late making payments.

30%—Amounts owed—The overall amount of money owed across all credit and loan products (student loans, car loan, mortgages, etc.) that you owe. Related to this category is your debt-to income ratio (DTI) which is also reviewed when you apply for credit. The DTI is calculated by assessing your total amounts owed against your income to ascertain the credit or loan amounts that you can handle.

Example:  Monthly expenses of $2000 ₌ 33% DTI             
               Monthly pre-tax income of $5900

A DTI that is higher than around 35%-40% is a signal to creditors that you may be overburdened by your current financial obligations.

15%—Length of credit history—How long you have held any type of credit or loan account. You will usually see an improvement as you get older and obtain additional accounts.

10%—Credit Mix—This entails the variety of the types of credit that you possess. A person with three credit cards as their sole basis of credit would have a less favorable credit mix than someone who has two credit cards, a car loan, and a business loan.

10%—New Credit—The amount of new credit accounts that have been opened over a short period of time. Applying frequently for credit will not improve your score and could in fact hurt it. When you apply for a new account, it will count as a “hard inquiry” that will stay on your credit report for two years, so keep this in mind and as recommended, only inquire for credit when absolutely necessary.

Getting Cozy with Credit – Focus on Needs

After a few years of managing your accounts responsibly, you can begin to think about how you might be able to benefit further from your cards.

For instance, if your income level or family size has increased, perhaps your mid-limit credit cards are no longer serving you. This would be an appropriate time to apply for a higher limit that would allow for more flexibility. Oftentimes an increase can be requested with a simple phone call to your lender. However, if they request your updated credit information, know that it will count as a “hard inquiry” on your report.

Keep in mind that with a higher limit you still want to stay in the  habit of paying off your balances in full each month, as well as keeping your credit utilization ratio low.

Credit Pro – Seek Out Cards with the Lowest Interest Rates and Greatest Rewards

Deadbeat habits? Check.  Exceptional payment history? Check. High credit score? Check. Once you have consistently shown creditors and lenders that you can handle credit responsibly, you will be able to obtain cards with the best features and benefits. For higher-tier credit cards, lenders prefer extending credit to those who have shown that they are frequent and high spenders. These are excellent credit options if you have a higher than average income, make routine large purchases, and easily manage paying off your balances. Many high-caliber cards often come with very generous credit limits, with the most revered and rare cards being reserved for only the highest and most responsible income earners. These cards offer perks such as concierge service, ticket presale events, and priority booking on hotels and reservations. 

Lastly, regardless of where you are at in your credit journey, don’t forget your monthly BIB personal finance review. Keep yourself ahead of spending by monitoring your progress consistently.

For the latest articles on applying for credit and other financial products, click below.