It seems like at least a few times a week I’m finding love letters from credit card companies in my mailbox. They all want my business and they’re all trying to tempt me with offers of low, low introductory rates or extra bonuses. I must say, a lot of those offers are pretty enticing. I find myself considering applying for at least half of them.
Now, obviously you don’t want to put in applications on several credit cards all at once, that would wreak temporary havoc on your credit rating. Every time an inquiry is made on your credit score, it drops slightly and is affected for about a year by the inquiry. But there are times when it’s really beneficial to go ahead and take advantage of whatever the credit card companies are offering.
1. When you’re carrying a large debt load
If you are currently carrying a credit card balance from month to month without paying it off, it may be to your benefit to apply for a lower interest card and do a balance transfer onto the new card. The best case scenario for this type of relief to your debt, is a 0% interest offer, even if it’s only temporary. In order to fully take advantage of this situation, though, make the most of the lower interest period and pay down as much of the principal as possible while the interest is low.
I do have a couple of quick warnings for you on doing this. For one thing, most credit cards will charge you a fee for doing a balance transfer. The fee can vary from card to card, but is usually somewhere in the neighborhood of 1% of the amount of the balance transfer. So, do the math and make sure the fee is justified by the amount of interest you’ll be saving.
Also, read the small print regarding the minimum payment that will be due each month. Again this is a number that can vary greatly from one card to another. Some cards don’t have minimum payments while others require as much as 4% of the outstanding balance to be paid each month. Ensure that you can still afford the monthly minimum payment on the card.
2. When your minimum payments are high
As mentioned above, some credit cards require a hefty minimum payment each month. If you’ve gotten yourself into a situation where your monthly minimum payments are making your cash flow too tight, start scanning those credit card offers and find a card that requires a smaller monthly payment.
3. When you’re trying to save up for travel
There are so many different reward schemes to choose from, when it comes to credit cards, and there are several that tie into traveling. There are cards that offer free air travel, cruise travel, hotel stays or car rentals, or good old fashioned cash, that can be used towards traveling. If you’ve been saving up for a trip, it might be the ideal time to apply for that new card and take advantage of a great introductory offer. A lot of cards offer a bonus points type offer when you first get the credit card and spend X dollars within the first X months. By applying for and getting one or two of these cards in a timely manner, you could discount the cost of your trip by thousands of dollars.
Some hotel chains, car rental chains, cruise shop companies, or airlines are affiliated with credit cards as well. If you already know who’s going to be getting your vacation business, why not try to double dip by taking advantage of their introductory offer and earning additional points for your next trip, at the same time?
4. When you won’t need a mortgage
As I’ve already stated, applying for additional credit can affect your credit score for up to a year. If you’ve recently renewed your mortgage and know you’re not planning on moving or re-mortgaging for a while, it may the ideal time to apply for additional cards and take advantage of their offers. Most mortgages get renewed for three to five years, so that gives you plenty of time to recover those lost points on your credit score.
The only warning I would offer on this strategy is to avoid applying for too many new cards at exactly the same time. Your credit bureau will show all applications that are open and some creditors may not like to see too many open applications at once. They may take it as a sign of desperation on your part and find that you’re too big a credit risk. I would prioritize the cards in the order of the awesomeness of their introductory offers and apply for them one at a time. Then I would systematically use them in order to fully maximize the bonuses they’re offering, and moving on to the next card’s awesome offer.
5. When you want to improve your credit score
This almost seems to contradict what I’ve said previously about how credit card applications affect your credit rating, but there’s no contradiction. While it’s true that each open application drops your score slightly, it’s also true that having unused credit available to you brings your credit score up. Part of your credit score is calculated using a statistic regarding the percentage of your available credit you are currently using. So, if you know that you’re currently using up a high percentage of your available credit and you know that you’ll be needing a loan or mortgage in the next year, you can help bring up your ratio of unused credit. Of course, this only works if you get the new card, but don’t rack it up.
So, although I would normally recommend avoiding the temptation that an empty credit card can present, getting a new card is sometimes the perfect strategy to help boost your finances. As with most things in life though, moderation and discipline are the keys to success, both in applying for and subsequently using those new cards. Used correctly, credit cards can be a great tool to add to your financial toolbox.