5 Money Moves to Make Before Applying For a Credit Card

By Dan Rafter on 4 June 2018 0 comments

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You're ready to apply for your first credit card. Or, maybe you simply want to add another card to the rotating deck of plastic in your wallet. Whatever the case, there are certain money moves you must make before filling out an application.

Adding a credit card to your name might seem like a small thing, but a credit card carries tremendous weight. It can be either a useful tool for building credit — or, if misused, it can lead you straight toward high-interest debt. It all depends on how you use that card and if you're financially prepared for it.

To get yourself off on the right foot, here are some important money moves smart consumers must make before applying for a credit card — whether it's their first or their fifth.

1. Do some budgeting

Don't have a household budget? It's time to make one. Have one? It's time to review it to make sure that it accurately reflects the money you are earning each month and the dollars you are spending.

Getting a new credit card could tempt you to make purchases that you can't afford to pay off in full each month. This will lead to you carrying a balance on your cards from month to month. With interest rates on credit cards being so high, this balance can grow out of control quickly.

Make a household budget listing the income you earn each month and the expenses you face. Expenses should include fixed costs that never change, such as your car bill, mortgage payment, and student loan costs. It should also include estimates for expenses that aren't the same each month, such as your utility bill or grocery bills. And don't forget to budget for discretionary expenses such as restaurant meals and entertainment.

If you have a budget, study it to make sure that it accurately reflects how much you spend and earn each month. If you rarely meet your budget, adjust it. Once you have an accurate budget in place, you'll know how much you can charge on a new card and still be able to pay it off each billing cycle. (See also: Build Your First Budget in 5 Easy Steps)

2. Check your credit reports

If you want to qualify for the best cards — with generous rewards programs and low interest rates — you'll need a solid credit score. Before you apply for a new card, do some research on your credit. (See also: Best Credit Cards for Excellent Credit)

You are entitled to one free copy of your three credit reports — one each maintained by Experian, Equifax, and TransUnion — every year. You can order these reports at AnnualCreditReport.com. Once you've done this, review them carefully. They will list how much you already owe on your credit card accounts, car loans, student loans, mortgage loans, and other forms of revolving credit.

They'll also list any late or missed payments up to seven years old. Other financial missteps, such as bankruptcy filings or foreclosures, will also be listed on your reports if they are not older than seven or 10 years.

If there are mistakes on your reports, contact the credit bureaus to let them know. And if your credit report is filled with late payments and high balances, you might want to take some time to pay down your other debts and build a history of on-time payments before applying for a new credit card. (See also: How to Read a Credit Report)

3. Order your credit score

Your credit score is another important number to know when applying for a credit card. This number gives financial institutions an instant look at how you've handled your credit in the past. A low score indicates that you have missed payments or other negatives on your record. A high score indicates that you have a history of paying your bills on time and keeping your debt under control.

You can order your credit score from any of the national credit bureaus. Expect to pay about $15 or so for your score. You might even have a credit card that shows your credit score in your monthly statement.

If your score comes in low, it again might be a good idea to pause your search for a new credit card. Build that score up by making on-time payments and paying off your existing credit card debt. This will boost your odds of qualifying for the best credit cards. (See also: I Checked My Credit Score in 11 Places — Here's What I Learned)

4. Pay off your existing credit card debt

You shouldn't be adding a credit card to your collection simply because you're running out of available credit on your other cards. This will only tempt you to make more purchases that you can't afford and lead you deeper into a cycle of debt.

Instead, work on paying off the credit card debt you already have. Don't apply for a new card until you've gotten your existing credit card debt under control. (See also: The 7 Best Credit Card Debt Elimination Strategies)

5. Build your savings

Financial experts recommend that everyone have an emergency fund of cash to help them pay for life's unexpected expenses — everything from a furnace on the fritz to a car that needs a new transmission. If you don't have an emergency fund, you might find yourself needing to turn to credit cards to pay for such emergencies. And that will only make your debt grow.

Before you apply for a new credit card, build an emergency fund. That way, you'll be less tempted to use your new card to pay for urgent big-ticket items such as a new water heater or an emergency brake repair for your car.

How much should you have in this emergency fund? It's generally recommended that you have enough to cover six months' to a year's worth of daily living expenses, though you may need more or less depending on your unique circumstances. (See also: 5-Minute Finance: Start an Emergency Fund)

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