Are you thinking about applying for a new credit card? You are not alone. A lot of people are actually applying for a new credit card on a yearly basis. Some credit card companies are actually secretive about how many new credit card accounts are being opened. But we are sure that it is in the millions. During their Investor Day in 2017, Chase revealed that 10.4 million consumers opened a new credit card account with them in 2016. This is just one company. There are other credit card companies that are working just as hard to sell their credit card products.
It is safe to assume that a lot of people are applying for a new credit card every year. Some are probably new users. Others are probably adding another account to an existing one. There are many reasons why some people want to get more than one credit card.
One reason could be to take advantage of new rewards. Some cards are best for traveling and will reward you with miles or hotel discounts. There are store credit cards that will help you get the best discounts from your favorite establishment. Sometimes, it could be to get a lower interest rate. Some people want to organize their expenses. These are all logical reasons to get a new credit card.
But of course, you still need to approach the application with caution. You need to ask yourself a couple of questions first.
Ask these questions before you get another credit card
There was a 1979 study that revealed how those with more credit cards tend to spend more whenever they visit department stores. There are several other studies over the years that proved how people who use their credit card pay more. They develop negative financial habits like forgetting what they spent their money on.
It is safe to assume that those with credit cards usually feel like it is an extension of their wallet. We all know that it is far from being an extension of your wallet. But even that knowledge does not hinder us from using it as if it was one. In fact, we sometimes use it to justify unnecessary expenses. This is why owning multiple credit cards can be dangerous.
So before you apply for a new credit card, try to put some thought into it. Ask yourself the following questions.
How do you manage your current credit card?
Do not get this wrong. There is nothing wrong with credit cards and their purpose in our financial life. However, if you do not know how to use and manage your cards, it will become a problem. You need to approach the use of your credit cards with self-control and discipline. The limit on each card that you own will be a huge temptation whenever you go out. It will feel like you can buy anything in the world. Of course, you should not forget that you are not really using your money. You are using the money of the creditor. You are borrowing their money through the card. As with any debt, you will be expected to pay it back and with interest.
What you need to do is to plan your credit card purchases around your budget. Assign it to one expense – like grocery shopping. Do not use it for impulsive purchases. By including it in your budget plan, you can guarantee that whatever purchase you make will be paid in cash within the grace period. This will ensure that your credit card will be paid without the interest rate.
How do you plan to use the credit card?
If you are applying for a new credit card because you always max out your current one, that is not a good reason to get it. You need to have a legitimate use for your credit card. If you travel a lot and you plan to use a travel rewards credit card on every trip, that should help you rack up the points. The same is true for gas or store credit cards. There has to be a specific purpose for the new card that you will use – and you need to stick to it. If you cannot find a reason for the card other than to extend your credit limit, then do not get a new one and practice managing your current one first. Pay it down and learn the right credit card habits before you get a new one. Otherwise, you will just be racking up more debt.
When you know the purpose of the card, it should be easy for you to identify the perfect card. You can easily choose which rewards will suit your spending habits well.
What is the interest rate?
Get the lowest interest rate that you can get on your card. If that is not possible because you have a bad credit score, then you need to postpone getting a new credit card first. You have to work on improving your score so you can qualify for a lower interest rate. Use your current credit card to do this. Pay it off and get a better credit utilization rate. Wait a month or two before you apply for a new credit card again – or at least until you see that your credit-worthiness has improved. This will increase the chances that you will be given a lower rate on the new credit account.
Having a low-interest rate on your card will lower the finance charge that will be added to your balance when it is carried off to the next billing cycle. Of course, if you make it a habit to pay off the full balance before the grace period ends, the finance charge should not be a problem for you.
Be careful of having too many credit cards
Statistics reveal that the average American usually has 13 credit obligations in their credit reports. Of the 13, 9 are most likely to be credit cards and the rest are installment loans. Using this data reveals that it is not unusual for the average consumer to have more than one credit card.
As mentioned, owning a credit card can only be destructive if you do not learn how to use properly. It is our own choices that are primarily causing us to land in problems with our finances. But if you follow these tips, you should be able to avoid the common financial mistakes that can haunt you in the future.
So how can you have a lot of credit cards and still avoid financial troubles?
- Learn how to manage it. You can start by including your credit card purchases in your monthly budget.
- Be clear about how you use your credit card. If it is only meant to pay the bills, buy groceries or for traveling – this has to be clear. Not only that, you have to strictly follow through with your intended purpose for it.
- Pay it off within the grace period. When you pay your balance within the grace period, you will avoid having the finance charge added to the balance. The grace period is the time between the date of purchase and the due date on the billing statement where that purchase is included.
- Avoid maxing out your credit card limit. Keep it within 30% of the limit. If your credit card limit is $10,000 you should keep your balance less than $3,000.
Once you learn how to use your new credit card properly, you do not have to worry about it anymore. It can even help you improve your credit score and give you something to fall back on during emergencies.