Whether it is your first time applying for a credit card or if you are interested in getting a new credit card, you may be wondering what determines getting approved for a credit card. There are a variety of factors that go into deciding if you should be approved for a credit card, and we have come up with five of the largest factors. Although we did not mention hard inquiries, you should also remember that hard inquiries of your credit score can also impact you getting approved for a credit card, as it suggests that you may be low on cash and need to open a variety of accounts to make ends meet.
1. Credit Score
While an excellent credit score is not a guarantee that you will be approved for a credit card, it does give the credit card company a good idea of what kind of borrower you are. A high credit score indicates that you are a good risk, as you have a demonstrated history of paying bills, maintaining a small number of credit cards, and using your credit card(s) responsibly.
2. Payment History
A credit card company will also consider your payment history when considering if you should be approved for a credit card. They will also look at the number of delinquencies on your accounts. If you have missed a payment or make a late payment, it will show up on your credit report for seven years. This may impact your ability to get approved for a credit card.
3. Debt-to-Income Ratio
Credit card companies will consider your debt-to-income (DTI) ratio when trying to determine if they should approve you for a credit card. The general rule of thumb is that you should have a debt-to-income ratio lower than 36%, as this indicates that you have a sufficient amount of income to pay off your debt. The lower your DTI ratio, the greater the chance you have is getting approved for a credit card.
4. Credit History
If you are younger, you likely will have difficulties in this category, as lenders like to see that you are an experienced and responsible borrower. If you are interested in acquiring your first credit card and do not have a credit history, you are a higher risk for a credit card company because they do not know what type of borrower you will be. You can mitigate the impact of not having a credit history by seeing if you can be put as an authorized user on someone else's account (like on your parents' credit card).
5. Credit Utilization Rate
Finally, credit card companies will look at your credit utilization rate, which just basically means how much of your credit limit you use. If you are consistently maxing out your credit card, even if you make the payments, you could be a higher risk. We suggest that you aim to use less than 30% of your credit card limit. For example, if you have a credit limit of $3,000 a month, you should try to use your card for $900 or less a month.
In conclusion, a variety of factors go into getting approved for a credit card, and now you have a better idea of what determines it. If you have a good credit score, consistently make payments on the card(s) you have now, spend less than your credit card limit and have a low debt-to-income ratio, you likely are a good risk for a credit card company.
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