Applying for a credit card loan can feel like a carnival game–submit the application and wait to see the specific terms you receive. You win if the interest rate is low, but lose if the rate is too high.
The application process is mysterious because credit cards issuers don’t fill in the details about the most important terms of your account–the APR, minimum payment, and credit limit–until the credit history has been reviewed and the loan approved.
Start with Credit Score
Before you apply for a credit card, get a copy of your credit report and credit score because lenders use this to set your credit card terms. If your score is lower than you anticipated, check your credit report for errors and correct those before you apply.
Your credit score will help direct you to the cards that you should consider. While scores may vary among lenders, there are some general guidelines. If your FICO score is 750 or above, you should apply for the cards specifically offered for excellent credit. A score of 720 or above is considered good credit; 660-720 is acceptable. A score of 640-660 is considered risky and the rates will be on the high end of the rate tiers; below 640 falls into sub-prime and credit card options are limited.
Credit card issuers pull credit reports for every application so know which card you should apply for. Do not waste your time and credit score applying for the wrong credit card or one that you will not qualify for. If you apply for too many credit cards at once, this is a red flag and may actually cause your score to drop.
Capital One is one of the few issuers that offers consumers some helpful guidance for its credit categories. The description in their application reads:
* Excellent credit if you have: had a loan or credit card for at least five years; a credit card with a credit limit greater than $10,000; never declared bankruptcy.
* Good credit if you have: a loan or credit card for three years or more; a credit card with a credit limit above $5,000; not been more than 60 days late on any credit card, medical bill, or loan in the last year
* Fair credit if you have: a U.S. loan of credit card; credit limit on a current credit card less than $5,000;
* Limited credit history if you have: your own credit card for less than three years or never had one; a limited credit history; a valid credit score that can be found at one of the major credit reporting companies.
Most issuers still split the APR into interest rate tiers with three rates. If you have excellent credit, you will receive the lowest rate. If you have poor credit, you will receive the highest rate.
If you typically carry a balance on your card, avoid reward cards because these typically have slightly higher interest rates. Find the card with the lowest rate for your credit tier.
The CARD Act prohibits issuers from raising interest rates during the first twelve months of the account (exceptions: late payments and increase in prime rate). After this, the issuer can raise the rate but must provide a 45-day notice.
The minimum payment percentage sets your monthly payment. The minimum payment varies by issuer and the majority of issuers do not disclose this in their terms and conditions. The minimum payment typically ranges between 1%-3%.
LowCards.com surveyed the terms and conditions of 85 online credit-card applications. Very few included minimum payment calculations in the application’s fine print. Some can be very difficult to understand.
Here is an example from the Michigan Association of Realtors Cash Rewards Visa Platinum credit card showing how complicated and confusing minimum payments can be:
“Your Minimum Payment will be calculated as follows: first we determine the ‘Base Minimum Payment’, which is the greater of $10.00 or 1.00% of your New Balance not including items (1) and (2) below. To the Base Minimum Payment, we may add one or more of the following items, as incurred on your Account: (1) any late, annual and/or any other Account related fee, (2) the Interest Charge, and (3) if your Account is over the Credit Limit, some or all of the balance amount over your Credit Limit. If the resulting Minimum Payment is greater than $10.00, the total is then rounded to the next highest dollar not to exceed your New Balance. Any Minimum Payment or additional amount you pay each month will not prepay any future Minimum Payments required, or change your obligation to make at least a Minimum Payment by the Payment Due Date.”
The credit limit is the most unpredictable and most frustrating of the three elements. The best way to guess what your credit limit will be is to average the credit limit of the other cards in your wallet. However, over the past two years issuer have slashed credit limits to reduce their loan risk. As a result, the credit limit may be less than you expect.