Consumer-focused changes to credit card regulations can help clarify your account agreement and eliminate some formerly troubling fees and practices. But, these changes should not strongly motivate you to apply for one or more new credit cards.
Signed into law in 2009, but implemented in early 2010, the CARD (Credit Card Accountability, Responsibility and Disclosure) Act helps card holders save some money and better understand the terms of their account agreements. When you compare credit cards, you’ll see that issuers are now prohibited from increasing interest rates on old balances, charging “unreasonable” late or other fees, and mandated to disclose key terms in your account agreement in large, bold fonts.
Credit card offers are now easier to understand and evaluate. However, credit card deals still require that you read and comprehend the offers. For example, looking for good balance transfer cards or low interest credit cards require your due diligence to ensure that other account terms are equally reasonable.
Credit card rates can still be changed and increased with proper notification. A credit card comparison should also include examination of all fees, beyond just late payment charges. For example, when you compare credit card offers, examine the difference in the point-of-sale purchase interest rate versus the cash advance rate, often significantly higher. When considering balance transfers, is there a flat fee or percentage you will face for a one-time transfer from another credit card?
More importantly, before you make that application for a new credit card, ask yourself a few hard questions.
Questions to Ask Yourself BEFORE Applying for New Cards
1. Why am I considering applying for an additional credit card? Do I really need it?
The most important question is the “why,” not the “what” with credit cards. Are your reasons financially sound? Until you have answered this question satisfactorily to yourself, do not proceed to questions 2 through 5.
2. What are the most important features I want in a new credit card?
Are you seeking better credit card ? Low interest credit cards? Zero percent balance transfer cards? After you identify the primary features you want, return to Question 1. Finding one or more credit cards that meet this criterion, you should then ask the “why” question again.
3. What primary uses do I foresee for a new credit card?
Can I afford another card? Do I have specific purposes for a new card? Can I really afford another monthly payment for these purposes? Do not consider affording a small “minimum payment” amount, but a true balance reduction amount. Depending on your primary use answer, can your budget manage another significant monthly payment?
4. Should I keep all of the credit cards I now have or close one or more accounts?
While you want to manage unsecured credit properly, understand that your credit score will take a short-term “hit,” as you receive more points for older accounts versus newer ones. This occurs because the credit bureau has a longer-term verifiable track record of balances and payments for older accounts, resulting in higher scores than with new, unproven credit lines. Yet, you also don’t want it to appear that you are overloading your budget with unsecured debt.
5. Have I examined all the available options to include the best credit card deals?
While your free time may be tight, examine all of the apparent credit card options when seeking new accounts. Become a knowledgeable buyer, just as you would when considering a new home, auto, mortgage, or any other major purchase. Competition tends to create similar credit card offers, but you might find some important differences. For example, a “hungry” credit card company may have interest rate “specials,” when they commit to increasing their account base. Spend the time necessary to evaluate all of your potential options.
First answer the questions, then compare offers
Notice that these imperative questions do not specifically involve the “technical” features of credit card offers (interest rates, fees, membership charges, etc.). After answering the overriding “why” in Question 1, the other questions are all related to the primary issue—whether you really need another card.
The recent deep recession has reinforced what experienced people already know: Cash flow, whether achieved through steady employment, investments, self-employment, or retirement income, is critical to living frugally and well. Interrupting cash flow, as the layoffs and downsizing have done, can quickly destroy a formerly solid budget and credit report.
Adding additional credit cards for emergencies only may be a wise plan. However, at some point you’ll need sufficient cash flow to repay the balance you create. Improved credit card consumer protection should not justify increased credit lines without other good reasons. Carefully consider all of the pros and cons of increasing your available credit.
If you determine that adding additional credit lines is a necessary or wise action, go for it. Should you have doubts after answering these questions, why not wait until you develop better answers to the “why?”