Factors That Credit Card Companies Look at When Evaluating an Application
Many people have a negative perspective when it comes to credit cards. Possibly, they have had a bad experience, either through accumulating high credit card debt, paying high-interest rates or even defaulting on a credit card. Understandably, this could be enough to scare someone away from using credit cards to pay for purchases. In the long run, however, you are going to need that credit card to enhance your credit score, cover financial emergencies and even do simple things like reserving a car or a hotel room.
Your credit rating or credit score follows you your entire life, so why not make it a good one? Having a good or excellent credit score can assist you in obtaining employment, renting an apartment and taking out a car loan. The thing about credit scores, however, is you must build up credit, in order to have a credit score. How high of a score you have tells banks and other lenders, how likely you are to repay the money you borrow. Essentially, it tells them if you are a good credit risk. Even something as simple as getting a cell phone contract can be dependent on you having a good credit score. Take a college student for instance, who has never used a credit card. They don’t have any student loans, their cell phone might be in their parent’s name, possibly they paid cash for their used car. Their credit score that will come back when a lender runs this person’s social security number, is likely to be very low, through no fault of their own. They may have thought they were making the right choice by not taking on consumer debt, and opening lines of credit, but in the long run this can be very damaging to their credit score. A credit bureau has no way to judge your creditworthiness if you have never used credit before, hence the low credit score. Now, suppose that same person has been in college a couple of years and took out a credit card to use for emergencies or large purchases. They might have to repair or replace a flat tire, or maybe books for one semester turn out to be more than they anticipated, so occasionally that credit card gets used. They could carry no balance from month to month, meaning that they pay the bill in full when it comes at the end of the month. If they do carry a balance, they always pay the minimum payment on time and are careful not to go over their credit limit. This usage of a credit card is helping this person, as they are gaining points on their credit score, as they use and make payments on their card. Now, when they choose to take out a loan for a car or apply for a mortgage on a home, their credit score will reflect such, and lenders will see a more favorable credit score.
What if your credit score has already tanked though, maybe even through no fault of your own? You may have experienced a job loss or a medical emergency, and the bills may have piled up quicker than you could do anything about it. There are credit cards that can improve your credit score as well. There are cards called secured credit cards where you give the lender or credit card company a set amount of money before receiving your credit card. Often, these cards have low limits such as $200 to $500, which is the amount you must put down as collateral. That amount is now your credit limit. You use the credit card as you would any typical credit card and pay the bill or at least the minimum payment the same as you usually would. The money that you put down to secure the credit card is held by the credit card company in the event you stop making payments and default on the card. Time frames differ between different credit card companies, but most companies will allow you to request your deposit back after 12 or 24 months, provided you haven’t missed or been late on any of the monthly payments. At this point some companies will simply turn the card into a regular, unsecured credit card, others will close your account and require you to open a new, unsecured credit card to maintain credit with their company. In this case, it might be advisable to just leave the deposit on the card and leave the account open, as your credit score might drop when you close the account.
As you can see, credit cards don’t have to be something that you are afraid of or that you are hesitant to open. By opening various types of credit lines and using them responsibly, you will be able to build a solid credit score in a fairly short time frame. Credit cards aren’t meant to be a way to extend your paycheck each week, rather, they should be used for things like emergency repairs or to purchase large items like furniture or appliances, which you need to make payments on overtime. This way, when you decide to apply for a store credit card that offers merchandise discounts, or you need to get a loan for a new car, your responsible credit card usage will be reflected in a higher credit score. This will result in lower interest rates, and something even a period of no interest, both of which can save you thousands of dollars on large purchases!