STUDENT TALK 5 Key Factors About Credit Cards
For those of us getting into adulting mode, credit and loans can sound like a bad thing. Aren't we all being taught not to get ourselves sunk into a ton of debt? But in reality, a credit card can be a handy tool to have, especially as you work toward financial independence. But getting denied for credit because you didn't meet the requirements (some you may not even be aware of) can be frustrating. Before you apply for that card, get comfortable with the following key factors. It’s not as cut and dried as you think.
1. What's Your Potential Eligibility for a Credit Card?
Credit card issuers look at your credit report/score, income, and income-to-debt ratio when deciding to approve or decline you for a credit card. The type of credit score you have, whether good, average, or low, should guide your search for a credit card to ensure the highest likelihood of approval.
Income (It's required when applying for credit or a loan) When it comes to reporting your income, as a student not yet working full-time, getting a card can feel like a game of chance. The issuer needs to verify your income to make sure you can pay off any credit you borrow, as well as any other debt you have including rent, insurance and any other active debts. But what will they consider when it comes to income? Is permanent, full-time job income the only type they count? For instance, if you submit income from a UROP or other campus job, does it count? In fact, since there is no guarantee that income will continue, if that's your only income, you may get declined. Sure, the same can be said for pretty much any job, since layoffs and getting fired happen. But a position that starts out temporary has a higher risk of being discontinued. That's the very definition of temporary. They also look for a history of work, but don't require a specific length of employment. That being said, if you have gaps in employment, frequent job hopping, or you tell them you're working but can't support that fact with paystubs, it's going to be a struggle to get the card approved. That information also shows up on your credit report, so don't try padding it in your application. Just expect, if you've had a gap in employment history, that you'll need to provide an explanation. Some examples of reasonable explanations: moving, having a child, volunteering for a project. If you can outline and document those, it'll probably be fine. Same with frequent job changes IF there's a responsible reason for it. Be prepared: If you can't document your income, or you've had frequent gaps because you just like to head somewhere warm for the winter, or randomly take off to explore the world, it's probably not going to fly with a lender.
If you’re over 21, the CARD Act allows you to report any additional income to which you have “reasonable expectation of access.” This could be a partner’s income or non-wage income, child support, or alimony. But you’ll need to disclose the source, and may need to add that other person to the card application if you’re using their personal income. Wondering where to find a credit card if your credit score is on the low side? Sign up for a site like Credit Karma. They'll provide you a rating as far as likelihood of getting approved for various cards. And read this post if you're wondering whether sites like Credit Karma are legit. Or consider a secured card to get you started.
2. Know the Numbers (Fees and Interest for Credit Cards)
There are a few fees and potential costs you’ll have to keep in mind when applying for credit cards:
Annual Fee: Some cards waive the fee for the first year. Some cards have no annual fee. Make sure you check before you apply. These fees can vary from $29 to $99 and even higher per year.
Annual Percentage Rate (APR): Also known as the card’s interest rate. Interest rates vary depending on the issuer and the type of credit card. Your credit score also has an impact. The higher your score, the lower the possible rate for your credit card. MIT Federal Credit Union offers cards that are worth considering.
Foreign Transaction Fee: This is a fee charged if you use your card in a foreign country. It's usually a percentage of each purchase. Check the fee on any cards you use, and keep it in mind when deciding whether something you're purchasing is a "good deal" in another country. Adding that fee to the purchase may remove the benefit of whatever you're buying.
Late Fee: This is a fee charged for being late with a payment. This can be quite a large fee, up to $29 for a first late, but up to $40 for repeated lates. It literally pays to do some comparison shopping on late fees. While you may not intend to pay late, sometimes it happens. Read more about late fees from The Balance.
3. Choosing a Credit Card
Once you know your potential eligibility, it's time to start credit card shopping. If this is your first credit card, consider options specifically for students or people with low credit. However, as mentioned above, these credit cards may have annual fees and higher interest rates. A secured credit card is a good option if you need to build credit or have yet to get a credit score.
Credit cards from retailers, such as Amazon and Target also have a higher chance for approval, but higher interest rates. These credit cards usually limit use to their retail locations and online. That being said, some allow cash advances. It pays to check. Credit cards with more lucrative benefits, such as travel miles or reward points, are usually reserved for those with excellent credit scores (which is usually around 700 and above) and a proven payment history. But don't get discouraged. Start with a single credit card an build your history. Eventually those cards offering the benefits you want will be within your grasp.
4. Check for Pre-Qualification
When you submit a credit card application, the issuer will get your credit report through a hard inquiry. This has an impact on your credit score, so don't apply for every credit card ad you receive in the mail or via email or text. One inquiry usually only results in a few points drop to a score, and it will go back up in a few weeks. But if you’re unsure you’ll get approved for a credit card, why take the hit? Consider checking to see if you pre-qualify for those credit cards instead. Pre-qualifying for a credit card is not a guarantee you’ll get approved, but it can give you an idea of your chances. If the response is no, then you don't waste the time (and the points) applying. Credit Karma is one place where you can do this type of search with soft inquiries. They'll even suggest cards based on your specific financial position and indicate the likelihood of approval.
To check for pre-qualification, the issuer will ask for some identifying information so that they can submit a soft inquiry for your credit report. A soft inquiry will not harm your credit score. Remember, applying for a card with multiple companies on a single day only counts as one inquiry. But if you’re applying every couple days for a number of weeks, each inquiry is going to knock a few points off your credit. It adds up.
5. What If You’re Denied?
Per the Fair Credit Reporting Act, credit card issuers are legally obligated to tell you why you are denied a credit card. You'll receive an adverse action notice in the mail. Once you know the reason, you can take the necessary steps to improve your chances of getting approved next time. Some possible reasons for denial include low credit score, low income, charged-off debt, and limited employment history.
If you believe the reason is in error, you can call the issuer and explain your situation. Have a clear plan going into the call so that you can make a case for your approval. For example, if the credit score they used was low because there were mistakes on your report, get that cleared up with the credit bureaus, then go back to the credit card company and let them know. (You can check your full credit report for free at annualcreditreport.com.)
Unfortunately, sometimes your credit score is just too low to qualify. Maybe you have to keep working at your UROP to prove it’s a source of long-term income while you’re a student. Or start reporting earnings from the side hustle you’ve been using to grab some extra cash (usually they'll need to see 2 years of history to consider income from a self-employment scenario). Sometimes the answer can be as simple as applying for a different issuer’s credit card.
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