Are You Credit-Ready?

Personal finance advice often creates two camps: those who oppose credit cards and those who support their usage (with responsibility, of course). I fall into the proponent camp, because I think building good credit is a great way to finance a car or house without paying in cash, which is difficult for most to accomplish. Additionally, cash back and rewards cards are a nice way to generate a windfall. As long as credit usage is within reason, it is an easy way to get more out of shopping.

This does not mean, however, that I encourage all to go out and sign up for credit cards. College students, low-income families, and newly hired, entry-level workers often fall into the pitfalls of 0% APRs with the promises of fortune. This article contains guidelines for making the decision as to whether or not you are ready to take on a credit card. I think it will be useful for both those with no credit experience and those who are looking to take on a second or third (or more) credit card.

Can you get it?

The first thing you need to know is whether or not you will actually get the credit card for which you are applying. Sometimes, having a low income, little experience, many inquiries on your credit report, or being young will negatively affect your application and result in rejection. Before wasting an inquiry on a card, decide if you have good odds of getting it. I was rejected from a Shell card recently, and this was disappointing and lowered my score for nothing.

What kind of card is it?

Is this a cash back or rewards card? An introductory 0% purchase APR card? A balance transfer card? How are you going to use it? Depending, but especially if this is a card with a low introductory rate, consider how much you are going to be racking up in debt. 2011 will come quickly.

Is the card good?

A good card is defined with the following qualities: No monthly, annual, or otherwise “membership” fee*, few asterisks in the explanation, low interest rate (below 20%), good grace period for payments, and a free rewards program. Examples are Chase’s Amazon.com Visa, which is my personal credit card.

* The exception is for prepaid cards, which almost always have a fee. These are for people who cannot get a regular credit card, but still want to build their credit.

If you get into trouble with your credit card, who will be paying for it? What is your contingency plan, should you become unemployed or disabled? Are you buying things on credit, or are you planning to pay off the card at the end of every month?

A guideline: If you can’t afford it now, you can’t afford it later. Trust me.

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