Editorial Policy

How to be the Perfect Credit Candidate

Erica Sandberg

April 25, 2013

QDear Erica,

I was reading a website that said banks like to see that people keep a running balance on their existing credit cards before they give out a new credit card. I guess I can understand that because that is how they turn a profit, but at the same time it is very unfair to the public. I want a credit card but why should I have to pay all those fees and stay in debt to be attractive in the eyes of a bank? — Laura

ADear Laura,

Where did you read such a thing? Oh never mind, it doesn't matter. All sorts of ludicrous (and sadly, harmful) information is floating around the Internet. Disregard that nonsense and learn the truth. Here are the most important qualities that banks — or credit issuers to be specific — really look for in a new cardholder.Ask Erica

The first is proof that you can handle all sorts of credit well, and have done so for a long time. Such evidence will be listed on your credit reports, and that's why banks check them (as well as the credit scores that are derived from those reports). Essentially, they want to be optimistic that any cash they lend to you will be reimbursed. The way you've done it in the past is an indication of how you may do it in the future.

While banks do like to see that prospective credit customers are charging, they aren't seeking people who overload their cards and carry over immense debt every month. Sure they make money from the interest applied to revolving balances, but maintaining a high debt-to-credit-limit ratio screams “risk!” They're quite aware that millions of cardholders get in too deep and can't repay what they borrowed. When that happens, some customers stop paying altogether, or they give up and declare bankruptcy. In either event, the bank loses.

Another aspect a bank looks for in applicants is that they make adequate income. Basically, they'll want to know if you have enough cash flowing in to handle the payments on a credit line. How much you spend on housing costs and other key expenses will be an unknown part of the equation, but your earnings and the amount you're currently repaying for other obligations will be enough to go on. If you don't have a job or are not making much, you probably won't qualify.

What else do banks find attractive? If you're applying for other credit products such as a mortgage or car loan, the down payment you can afford will come into play. The bigger the down payment, the more attractive you are. Plus, avoid applying for many loans and credit cards in a short span of time. Banks tend to be wary of people who are aggressively seeking credit, as it can seem like you're desperate for quick cash.

Conversely, having too much available credit can be perceived negatively. For example, if you have a credit card with a $50,000 limit just sitting there, you have the ability to charge many thousands of dollars overnight. Such an obligation would impact your ability to repay a new loan. So lowering super-high credit limits may behoove you. At the same time, don't wipe out those limits altogether, especially if you are carrying balances on other cards, as this could raise your debt-to-credit ratio.

As you can see, banks aren't actively pursuing people who will live in a state of perpetual debt. Besides charging interest and fees, they have other ways of turning a profit, such as what they charge merchants when you pay with a card.

Your letter is a great lesson for everyone. We all need to be more discerning. When looking for facts about vital financial issues, always turn to reliable news sites and genuine experts.

Got a question for Erica? Send her an email.