Do you need to open a new credit card? The average American owns 4 credit cards. There’s no limit to the number of credit cards that you can own. But you have to remember, the more cards you own, the more danger you’re in. It’s very tempting to keep using it to pay for the things you need. It really feels like it’s an extension of your wallet. If you can’t control yourself, you might end up using it too much – until you reach the credit limit. By then, it would be very hard to pay off your debts. The high-interest rate of the credit card and the fees and charges associated with maxing out your limit will all work against you.
This is the reason why you shouldn’t be careless about opening a new credit card. You have to make sure that there’s a real need for it. And if you are in the midst of a crisis, it’s all the more reason for you to avoid opening new credit accounts. The temptation to use them will be very high and it might just ruin your financial future.
If you want to preserve your future self from the burden of paying off all your debts, you have to be smart every time you have to open a new credit account.
3 conditions before you apply for a new credit card
While opening a new account is not exactly a crime, make sure you understand certain conditions first. These conditions should be met if you don’t want the additional credit card to compromise your personal finances.
Good credit score
When the pandemic happened, there was a noticeable decline in new credit card applications. And people with super prime scores had the biggest decline in applications. Even with inquiries.
What does it mean to have a good credit score?
This is an indication that you are a responsible credit user. When you borrow money, you know how to pay it back. You understand your responsibilities and you never borrow more than what you can afford to pay. This type of borrowing makes creditors and lenders feel confident in your ability to repay your debts. They won’t have to give you a high-interest rate to protect themselves from the possibility that you won’t stick to your payments.
That means if you open a new credit card account with a good credit score, you’ll be given a low-interest rate. It won’t cost you a lot in terms of finance charges. So make sure that before you file your application, you have a good credit score first.
Manageable credit card balance
Another condition before you open a new credit card is to check your existing cards. Do you have an existing balance? If you do, you need to find out when you can completely pay it off. Because if you will get a new card, you’ll probably use it too. This will just add to the existing balance that you have. You’ll be in danger of burying yourself under a huge amount of debt.
If you want to avoid that, you have to make sure your current credit card balance is manageable. If not, then you have to postpone opening a new account. It’s also a great time to really think about the necessity of having a new card. If you find that you don’t really need it, then maybe you shouldn’t open another account. But if you know that your financial situation will benefit from it, then go ahead. Just make sure to pay off your existing cards first until your balance is manageable before you send a new application.
Sufficient emergency fund
The final condition that you have to meet before sending in your new credit card application is to make sure you have enough emergency funds. As mentioned, opening another credit account will put you in danger of burying yourself further in debt. You’ll feel more secure if you have enough emergency savings.
But how much is enough? The best scenario is to have your emergency savings bigger than your credit card debt. That way you are secure despite the new credit account that you’ll open. If you happen to land in an unexpected situation, you won’t be forced to use debt to get out of it. Or you won’t have to sacrifice the funds you’ve set aside for your debt payments. You can use your savings to get yourself out of a tight spot.
Apart from that, having an emergency fund will make you feel secure with your finances. You’ll feel more confident about your ability to pay off your debts. It’ll give you the courage to be more aggressive in paying everything off.
Benefits of having a new credit card
Unless you’ve met all three conditions, it’s not advisable to open a new credit card. But why would you want to open a new account anyway? This is especially true if you still have existing credit cards that you can use?
The truth is, owning multiple credit cards is not bad. The key to owning more than one card and still keep debt troubles at bay is to learn how to use credit wisely. Since we live in a society that encourages the use of debt, you need to stop avoiding it and just learn how to keep it under control.
You see, opening a new credit card can be instrumental to certain benefits that will improve your financial situation.
Extended credit limit
The first is having an extended credit limit. Opening another card will make your credit limit higher. If you don’t use that card immediately, you can improve your credit utilization ratio. When that happens, you’ll end up with a higher credit score.
How does that work?
For instance, your balance now is $3,000 and your credit limit is $7,000. Your credit utilization rate is around 42%. The ideal rate to maintain a good credit score is 30%. If you open a new credit card that has a limit of $3,000, your new limit will now be $10,000. This will bring your credit utilization rate down to 30%.
Rewards and perks
Another benefit of opening a new credit account is the rewards and perks. The truth is, a lot of people open a new card because of the rewards. If you can use your card and get back points, freebies, or cash-back rewards, then using debt becomes worth it. As long as you use this card with a purpose, you’ll enjoy these rewards – and it might even help you save money in the process.
So if you find a credit card that can meet your spending needs, you might want to consider having that card. But here’s a word of caution. Make sure that this card is really something that you’ll use. If not, you’ll just waste your time and money paying off the fees and charges associated with the card.