Don’t Apply For a Credit Card Until You Read These 6 Tips
There are two ways in which you can apply for a credit card: one, fill the application for any card that catches your fancy and second, understand your needs and learn all the important information about the shortlisted card first before applying.
There is much merit in using the second method. It ensures two things. That you apply for a card that meets your needs best and that your application is approved.
Read on to know what information to check before applying for a credit card, and how to improve your credit score if it is not at par.
- Check if you meet the minimum income threshold
If you’ve ever filled a credit card application, you would know that you need to give many different details, like age, birth date, monthly income, etc., to the bank.
Why do you think banks ask for all these details?
Each piece of information helps bank decide if you qualify for the applied credit card or not. However, the most important information here is your monthly income.
Higher income is equated with a better ability to pay a loan. (Theoretically this equation is good, but practically it is not always true. CIBIL credit score and history, not monthly income, is a better measure of someone’s financial discipline and creditworthiness. A bank always takes these two into account as well when evaluating the application.)
Knowledge about the applicant’s income also helps the bank decide about how much credit it can give to the applicant. The maximum limit on the credit card is always in proportion to the holder’s income. That’s why all credit cards have a minimum income threshold, and the higher the credit limit, the greater the minimum income threshold is.
Before submitting an application for a credit card, ensure that your income is equal to or above the minimum income for that card. Otherwise, you will be only wasting your energy and time and paper.
- Your CIBIL score and credit history matters—a lot
For most credit cards, the minimum CIBIL score is in the range of 700-750. Anything less will see your application turn down.
If you want a specific credit card, but find your CIBIL score is below the threshold, the smart thing to do is to up your score first. (For specific tips on how to do this, please check the last section of this post.)
- It is easier to get a card from your existing bank
Need a credit card quickly? Well, apply with your existing bank.
Getting a credit card from the bank with which you have an existing relationship is relatively easier and the approval process considerably faster, of course provided you’ve handled your account properly.
- Free credit card Vs Cards with an annual fee
A free credit card is a good option for those who mostly use a card to pay for their grocery, fuel, or movie tickets.
Those who use their credit card heavily, in range of 40% to 50% of their overall spending, will, on the other hand, benefit from premium credit cards. These cards offer a multitude of exciting bonuses and offers, but also have an annual fee attached to them. Such a card can help you enjoy great benefits and save money.
Premium cards offer higher reward points and better cashback schemes. They also have a tie up with shopping stores, eateries, fuel companies, hotels, airlines, etc., and so offer you a great chance to get discounts and gift vouchers. For instance, someone who flies a lot will benefit from holding a card with a special tie-up with makemytrip.com or yatra.com. You can then win handsome discounts on airfare or accommodation, features that a basic card will not offer.
- Know your needs
Some credit cards are good for travel, some for shopping and dining. Before applying, you must know what you want from that card, whether that card gives you what you want and whether that card is the best in its category or the best that you can get in that category.
- You can get a credit card against a fixed deposit
There are many reasons why banks reject credit card applications, two most common being inadequate monthly salary and a poor CIBIL credit score. If either or both are not up to mark, taking a credit card against a fixed deposit is a good option. For most banks the minimum fixed deposit amount for getting a card is INR 20,000.
Most banks allow customers to take a credit card against a fixed deposit, which serves as a security. Because the card is taken against a fixed deposit, the card limit is never more than theamount of the fixed deposit (It actually is always a little less than this amount.). For instance, if the fixed deposit is INR 40,000, the card’s maximum limit will be in range of INR 25,000 to INR 30,000.
Such a card presents no risk to the bank, because it can always take the money out of your fixed deposit in case of non-payment. This explains why the processing time is shorter for this type of card, and why such cards are called Instant Credit Cards. No income proof is required for these cards.
For whom this is a good option?
Those who want a credit card but are not eligible for unsecured credit cards as well as those who want a credit card to improve their CIBIL score.
You need to build a positive credit history (which you can’t do without a credit card) to improve your CIBIL credit score. However, a bad credit history prevents you from getting a new credit card. The workaround is to get a credit card against a fixed deposit, use it to not more than 30% to 40% of its maximum limit, and make payments on time.
Tips for improving—and maintaining—CIBIL credit score
A poor CIBIL score can seriously limit your ability to take a loan in future. Practice the following best credit card usage habits to improve and maintain your CIBIL score.
- Pay your bills on time
“Spend today and pay later” is a viable policy only if you pay the bills in the next billing cycle. Carry it any further and your credit score will take a big hit.
- Using the card to its maximum limit
You always pay the bills on the time, but may still find your credit score falling if you report a high credit utilization ratio. (Credit utilization is defined as the percentage of your card’s maximum limit that you use. For instance, if you spend INR 10,000 on a card with a limit of INR 20,000, the credit utilization ratio is 50 percent.)
A high credit utilization ratio is bad, but that doesn’t mean that a low credit utilization ratio is good for building your CIBIL score.
The CIBIL score is a representation of your ability to pay credit on time. To be evaluated, you must take a certain amount of credit. If you use your credit card too little (in other words, if you take too little credit), your ability to pay credit or your financial discipline cannot be correctly measured. Using the card sparingly doesn’t hurt your credit score, but it doesn’t push your score up, either.
What a bank wants to see is that:
- you are not dependent on your credit cards (a high credit utilization ratio is inferred as dependency on credit);
- you use your credit cards moderately—that is 40% to 50% of their maximum limit; and
- you ALWAYS pay your bills on time
Instead of using one credit card excessively, spread the usage evenly across your other cards. This way you will have a healthy credit utilization ratio on each of your cards, which augurs well for your CIBIL score.
- Don’t apply for multiple credit cards simultaneously
Applying for many cards at the same time is read as ‘credit hungry’ behavior. And financial institutions don’t like people who are credit hungry.
Whenever a credit application comes to a bank, it first looks at the applicant’s credit information. And whenever a financial institution accesses your credit history to evaluate a loan application, a ‘hard inquiry’ is created. Too many hard inquires on your credit report negatively affect your credit history.
The best practice is to not submit more than one loan application (a credit card application is a loan application) in six months. So if you want two credit cards or if your current application was rejected, wait for six months before applying again.
- Don’t keep more than 2-3 credit cards
Having too many credit cards is also inferred as dependency on credit. That’s why, you should not keep more than 2-3 cards in your wallet.
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