No one wants a credit card that carries an interest rate of 20% if they could get one at 7%, and without any annual fees, but as we know the barrier-to-entry for such credit cards is the applicant’s credit score. Your credit score is a reflection of your “credit-worthiness”, but don’t forget that there are other factors that also determine whether you qualify.
It may be said that the vast majority of people turned down for credit cards have been rejected due to having a bad credit history (missed payments – arrears, defaults, CCJs), but people that have too many cards, and people who have an imbalanced credit to debt ratio also get declined for low-rate cards.
Let’s have a look at all the factors that determine whether you qualify and what you can do:
Number of Credit Cards.
If you have opened more than one or two accounts in the last 6 months then it’s likely that a lender will not look at this favorably. In addition, no more than two revolving accounts opened in the past 12 months should have a balance outstanding. Finally, you should not have more than four revolving accounts that currently have balances, regardless of how old the accounts are.
This calculation is the ratio of your current balance to your available credit limits. For example, if you have a $1,000 credit limit on a card and your balance is $800, your balance-to-high-credit ratio is 80 percent (800 divided by 1,000). This ratio should not exceed 80 percent for two cards and 60 to 65 percent for three or more cards.
Creditors want to know what percentage of your monthly income is going toward your bills. Their fear is that if you use a high proportion of your income to pay bills, you may not have enough money available if a financial emergency arises or if your income should drop. To calculate your debt-to-income ratio, divide the monthly sum of your payments on credit bills (and the mortgage or rent you pay) by your monthly before-tax income. Most lenders require a debt-to-income ratio (including the mortgage or rent) of less than 35 to 45 percent.
Typically, banks require a minimum income of $12,000 for a standard card and $30,000 to $40,000 (household) for a gold card. Some banks require a minimum income of $20,000 to $25,000 for a standard card, and some banks have no minimum income requirements.
In general, if you have any accounts that were ever behind more than 60 days in the past four years, this will count heavily against you. Obviously you shouldn’t be behind, even by 30 days, on any accounts at the time you apply.
Anytime you fill out a loan application, you are allowing a potential credit grantor access to your credit history, and an inquiry will appear on your credit report. Also, your current credit-card issuers may review your credit report from time to time, creating additional inquiries on your file.
When you apply for a credit card, the lender checks your credit report, and too many inquiries in the six-month period before your application can mean automatic rejection. The threshold really varies from lender to lender. One bank allowed no inquiries in the past six months, while another allowed nine in the same period of time. In general, inquiries for retail cards seem to be viewed more liberally than those for bank cards.
Promotional inquiries are those created when a bank asks the credit bureau to review your credit report before mailing a pre-approved application. They are an exception to the inquiry rules. Since they do not appear on the credit reports sent to lenders, they should not count against you.
If your credit file shows a collection account (also referred to as a profit-and-loss account), most lenders will reject your application out of hand. A collection account is one that you failed to pay, so the lender turned it over to a collection agency. One possible exception to this standard is a medical bill that was ultimately turned over to a collection agency. In such a case, the amount in question has to have been small and have been fully paid before the applicant can be considered favorably.
Public Record Information.
This is information about bankruptcy, judgments, repossessions, federal tax liens, wage garnishment or foreclosure that appears on credit reports. In most cases this type of information causes immediate rejection. If public record information on your credit record is more than four years old, your application may still be considered by some lenders. However, your other qualifications must be very strong to overcome that negative information.
Employment and Residency Requirements.
Stability counts. Most lenders require you to have been at your present place of employment for at least one to two years. They also expect you to have lived in the same city or area for two years, although this does not appear to be a hard-and-fast rule.
Credit card issuers offer low-interest cards to people who have few credit cards, a low debt rate, enough income to pay the average debts accumulated and a good credit history.