5 Things to Know Before Applying for a Credit Card

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If you have never had a credit card before, the application process can be confusing. Deciding which credit card is right for you can be overwhelming. Don’t be fooled into applying for the first offer you receive. Research to find the credit card that works best for your situation.

Is there an annual fee?

While an annual fee may not be a deal breaker, it is best to know if the rewards or benefits of the card are worth the amount the credit card company charges annually. Annual fees range from $55-105/year depending on the type of credit card. If you do not plan on using a rewards card in order to earn more than that in points or credits in the year, then this card may not be the right one for you.

Is there an introductory period?

Introductory periods are great because you can usually get 0% interest for some extended period of time. If you plan to make a big purchase that you cannot pay for in cash immediately, but will be able to afford in a few months, this option could be perfect for you. This means that you could make your purchase, but not pay interest on it for a number of months. If you do not plan on paying off your purchases quickly, then it may be best to reconsider getting a new credit card.

Are balance transfers free?

If you are trying to pay off your debt, balance transfers can really help. Balance transfers allow you to transfer the balance of one credit card to another. Why would you do this? Let’s say you have a credit card with a 20% interest rate and one with an 8% interest rate. If you want to pay the credit card off, transferring it to the lower interest rate would allow you to pay more towards the principal, or non interest balance, which will allow you to pay the credit card off faster.

What is the APR?

When most people apply for a credit card, they look at all of the introductory benefits of the card. Well, let’s say you apply for a new credit card with the intention of paying the balance off within a few months. What happens if you lose your job during this time? You may no longer be able to pay off the card, but you will still have the balance due. Once your introductory period is over, you will have to pay the standard APR. If the interest rate is high, you could end up paying much more than you bargained for. Pay attention to the standard rates before applying for a new card.

Are there any rewards points offered?

Rewards cards can range from cash-back options to redeemable points. Consider your need for a credit card and use that to decide whether or not you should look for a rewards or loyalty cards. If you are planning a vacation in the next year, you may decide that a travel card with a introductory points would be most beneficial. Many of these cards will provide points for each dollar spent on approved purchases that can be used for travel, food, or cash.

Which credit cards do you prefer?

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5 Things You Should Know About Credit

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Your credit report and your credit score are not the same

While your credit score is calculated by the information on your credit report, these two things are different. Your credit report is made up of all inquiries, account history, debt accounts, public records, and much more information. The score may determine the interest rate you are offered on an offer of credit, but many times, the credit history on your report will decide if you are approved or declined for credit.

Credit reports help you stop fraud

Viewing your free credit reports once a year, as suggested by the federal government, can help to spot and stop fraud. If someone has stolen your identity, there will likely be credit inquiries and/or accounts that you are not aware of. You should contact the credit bureaus immediately and start the process of regaining your identity.

Your credit score is based on 5 areas

There are 5 core areas that make up a credit score. They are credit inquiries, credit utilization, average credit age, payment history, and account mix.

Credit inquiries refers to companies reviewing your credit report after you have submitted an application. These inquiries stay on your credit report for two years; however, only the previous 12 months will have an effect on your credit score.

Credit utilization accounts for a large percentage of your credit score because it is based on the amount you currently owe your creditors. Installment loans such as, mortgage, car notes, etc. are included in this number; however, revolving credit, such as credit cards, has the biggest impact on this score.

Credit age measures how long you have had a credit history and how long your accounts have been open. The longer you have had credit, the better this score will be. This is why it’s important to not close old accounts if not needed.

Payment history has the largest impact on  your score because it is what tells a creditor that you will make the necessary payments to them in a timely fashion. It is very important to pay your accounts on time to prevent losing excessive points for late or derogatory payments.

Account mix is the mixture of different account types on your credit report. Having a mix of accounts including credit cards, auto loans, mortgage loans, etc. will help to improve this section.

Your credit score influences your interest rates

If you are in the market for a new home or car purchase, your credit score will impact the amount you are paying. Interest rates are generally decided based on your credit score; the higher the score, the lower the interest rates. Be sure to shop around for the best rates before buying a new home or car.

Joint accounts affects your credit the same as individual accounts

Contrary to popular belief, if you co-sign a loan with someone, you are held equally liable for repayment of the loan. Therefore, if the loan defaults, your credit score will be impacted.

Tell us something you’ve learned about your credit score!

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