When is the timing right for a new card?
By Erica Sandberg
September 2, 2014
We are one of those paycheck-to-paycheck couples. We don't have credit cards. We did, but we closed them a year ago and now only have bank cards. I want a credit card again. We have a $200,000 mortgage and two car loans that we are never late on. The cars are worth $70,000 in total. I have a 401(k) with $130,000, and my husband's 403(b) and pension have $90,000. What credit card should I get? —Emily and Jeff
Dear Emily and Jeff,
So you had some credit cards, but for unstated reasons, you canceled them? And today you only have enough money coming in to meet your current expenses? I see a little red warning flag waving in your horizon.
Though you do have considerable assets, you also have major liabilities. It can be awfully tempting to tap into a credit line when times get tough and you have trouble meeting your bills. Perhaps that's the reason you abandoned the cards before — you found yourself relying on them and got into debt.
Nonetheless, credit cards are fantastic payment tools when used correctly — to pay for the things you can afford. So I will tell you how to get one again, but bear in mind that I want you to also be exceedingly careful once you've got it.
I don't know what your credit reports look like, but if you've been making your mortgage and vehicle loan payments on time, they may be in good shape. Payment history makes up 35 percent of a FICO credit score, which most lenders use to determine qualification and terms. As long as you don't have any bankruptcies, collection accounts, late payments and legal debts such as outstanding judgments and parking tickets, you should be OK. Your history with your closed credit card companies will count, too. If you treated them responsibly, your activity with them will work in your favor.
Also vital to a credit issuer is the amount of debt you currently hold. Although your current debt is installment loans and not revolving balances (as you'd have with a credit card), those loans could be a concern as it might appear that you're already in too much debt.
Essentially, a new lender wants to be as sure as possible that you can afford to pay back what you borrow, easily and as promised. That means there is one more vital consideration — your household income. You'll list that on your application.
A credit issuer won't be able to see what you're paying for groceries, vacations and other expenses, nor what funds are in your retirement accounts. They won't know that you're barely making ends meet. All they'll see is what you bring in monthly from what you put on the card application and your past and present credit activity from your credit report.
Be realistic: Do you think a credit card company will believe you can afford and can handle a fresh credit line? If the answer is yes, you'll probably qualify for a credit card. Which one is right for you depends on your credit scores — you can get them at MyFico.com for about $20 for each of the three major credit bureaus. Apply for the card that matches your rating.
Back to that red flag. It's telling you something: Be careful. If you're going to charge again, commit to being prudent. It's bad enough to live on the financial edge, not knowing whether you're able to put food on the table and satisfy your creditors. Don't add credit card debt to the mix. Charge only to pay for those necessary items that are in your budget — which I suggest you pare down so you don't feel so unstable.
Got a question for Erica? Send her an email.