A credit card account is as easy to open as a checking or savings account -- if not easier. Applicants can apply online through a bank's website, and often find out instantly whether or not they're approved. But before applying for a credit card, here's a guide on what you'll need, and how to decide which one to apply for.
How to open a credit card
When you apply, a lender will ask you for some important personal information, including the following:
- Your name
- Date of birth
- Social Security number
- Employment information (employer name and income)
- Monthly mortgage or rent payments
- Whether or not you have a checking or savings account
The bank will verify some of the information you supply, pull your credit report to ensure you meet their underwriting criteria, and then make a decision on whether or not to approve you for a credit card. The most important factors will be your age (sometimes), income, and credit score.
Why your age might matter
If you're 21 years old or older, don't worry -- you meet the basic criteria here and can skip to the next section on income below. That said, people who are younger than 21 years old need to be mindful of some recent regulatory changes affecting who can get a credit card.
Credit card companies generally only accept applicants who are at least 18 years of age. Those who are 18, 19, or 20 years old will find it more challenging to get approved for a credit card. By law, credit card companies are required to collect an applicant's income and financial asset information -- and verify it, if the applicant is younger than 21 years old. This is to prevent young adults from claiming $100,000 of annual income, getting a credit line consistent with that level of income, and then charging up balances that will haunt them for years and years.
If you're older than 18 but younger than 21, a student credit card may be your best bet. In this group, a secured credit card may be your only option, unless you have significant provable income that can qualify you for a better card.
Credit cards are easier to qualify for than most other loans. Because credit cards are effectively small-dollar loans (credit limits start as low as $200), most working people have sufficient income to qualify for some type of credit card.
As a general rule of thumb, the monthly payment on a credit card is usually only 3% of the balance outstanding. Thus, to qualify you for a card with $1,000 credit limit, a card company really only needs to see that you have enough breathing room in your budget to afford a $30 monthly payment.
For obvious reasons, having more income relative to your expenses (mortgage or rent, and payments due on other loans) will enable you to qualify for cards with higher credit limits. In short, at a certain point, more income doesn't help much for getting approved. An applicant who earns $30,000 per year may get approved for the exact same card as someone who earns $200,000 per year, but the higher earner is likely to receive a much higher credit limit.
What about your credit score?
While credit scores are important for the very best credit cards, most people can qualify for a credit card even with good or bad credit -- or no credit at all.
If you have an excellent credit score, the world is your oyster. Pick a card, and you'll qualify, provided you have the necessary income. Credit card companies spend more effort and money attracting this cohort of potential cardholders than any other, which is reflected in the sky-high sign-up bonuses and cash-back rewards for people who have excellent credit.
Having a low credit score, or no credit score, isn't a deal breaker. In fact, one well-known card issuer reports that as much as 18% of its credit card loans are issued to the roughly one-third of Americans who have a credit score of 660 or lower. See Fool.com's list of the best credit cards for people who have good credit, a list designed for people who have short credit histories, high loan balances, some bad marks in the very distant past, or no credit history at all. (No credit history is certainly better than bad credit history.)
People who have truly bad credit because of recent late payments or judgments may have to start with a secured credit card. Secured credit cards work just like any other card, with one major difference: You have to put up collateral (a cash deposit) to open the card. The best secured cards we found in our research require deposits ranging from $49 to $200 for a $200 credit limit. Luckily, secured credit cards report to the three major credit bureaus just like any other card, so they're a really good way to start rebuilding a "bad" score -- more on that in an article about how to rebuild from a 600 credit score.
Answering the "why"
We've gone through the three most important determinants in which cards you'll qualify for -- age, income, and credit scores -- so now it's time to address the reasons why you want a credit card. There are so many cards on the market today that it's highly likely you'll find one that feels almost tailored to you, with perks that fit your spending habits and credit needs.
- For everyday swipes: If you're simply looking for a good card to meet your daily spending needs and plan to pay in full each month, then there are many no-annual-fee cards that should more than meet your needs. There are a handful of cards that offer 1.5% to 2% cash back on every purchase in Fool.com's database of cash back credit cards, all without an annual fee.
- For 0% financing: If you want a credit card to help you finance an upcoming purchase (fixing a problematic car transmission, or putting a fence around your backyard, for example), a 0% promo APR card can be a good choice. You'll pay about $621 in interest over 15 months on a $5,000 balance at 18%, a typical credit card interest rate, but a 0% promo APR card can offer the same 15 months of financing at no cost to you.
- For free vacations or extra spending cash: If you have excellent credit, credit cards will literally pay you to pick them. One top-shelf credit card offers a lucrative sign-up bonus worth $625 in travel (seriously!) at the cost of a $95 annual fee, which is waived in the first year. But even no-annual-fee cards can offer attractive bonuses. One no-annual-fee card in particular offers a $150 cash bonus to qualifying cardholders, while a similar travel card offers a $200 travel bonus to qualifying cardholders. See Fool.com's list of the best sign-up bonuses on the market right now, as offers change frequently.
At Fool.com, we take the view that a credit card is nothing more than a financial tool. Those who use them wisely and pay their balances in full each month get all the benefits of a credit card (0% APRs, cash-back rewards, more fraud protection, etc.) without paying a dime in fees or interest.
Credit cards shouldn't be used as a license to spend money, but as a payment method for purchases you'd make even if you were paying by cash or debit. The truth is that carrying balances from month to month can be a financial disaster, an expensive lesson in what getting charged 20% interest really means (it's not good!). With this in mind, it's important to understand yourself before opening a credit card account. If you have a predisposition to be a shopaholic, stick to cash or debit. But if you can maintain a budget and avoid the temptation to use a card as a reason to spend beyond your means, a credit card can be a really powerful financial tool.