Money Smarts Blog

Situation: you’re in the market for a new credit card, but you’re not so sure about what exactly is going on with your credit situation, or what it even takes to get approved for a credit card in the first place.

The good news is that getting an idea of what’s going on with your credit is a pretty easy, but you might have to do some work if your financial pictures is less than Instagram worthy. Here’s what you need to know to apply for a credit card and actually get approved.

1. Know & understand your credit score

Your credit score is generally the number one determining factor when it comes to getting approved for a credit card (or any other form of credit, really). So it’s important to know what you’re working with before you start filling out applications.

If you already have a credit card somewhere, your provider may offer a free FICO or Vantage score as a feature of your card. If you don’t have a credit card at all, or your card doesn’t offer a free credit score, sites like Credit Karma and Credit Sesame are another reliable option to get a feel for where you credit’s at.

Regardless of where you get your score, it won’t help you determine what kind of card you should apply for if you don’t know the difference between a good or bad score.

Here’s a quick breakdown of what various credit scores mean:

If your score falls somewhere between the average and bad rating, don’t panic. It doesn’t necessarily mean you won’t get approved for a card, but it does probably put you out of the running for cards with really good rewards programs or sign-on bonuses. It may also affect the rate you get on your card.

The good news is not every financial institution or credit card provider scores applicants in the same way. Credit Unions (like us) are more likely to consider your relationship with them as part of the approval process – so if you’ve had an account for a while and maintain good standing it may help you get approved.

2. Check your credit report

Your credit report can give you some valuable insights into just why your credit score is the way it is. So if you’re wondering how it got to be so low (or so high), this is a good place to start.

Regardless of your curiosity level, you should also check it fairly regularly to make sure everything is as it should be – i.e. none of your lenders are reporting false information, like late payments you know you made on time.

You can get a copy of your credit report from all three major credit bureaus free once a year at annualcreditreport.com (thanks, federal government!). No, this does not affect your credit score, so you don’t have an excuse not to do it.

(For a bunch of other reasons why you should check your credit report, check out our Crash Course in credit series: Lesson 1, Lesson 2, Lesson 3)

3. Pay down your debt

Another major factor in whether or not you’re approved for a credit card is your debt-to-income ratio (DTI). This little number is basically a way to measure how much you spend on debt payments every month compared to your income.

Your debt-to-income ratio is calculated by dividing your total recurring monthly debt payment by your gross monthly income.

Let’s say you make $60,000 a year. Your monthly income is $5,000 and your monthly debt payments total $2,500. Your debt-to-income ratio is 2500/5000 or 50%.

Generally you should keep your DTI at or below 30%. So if this really were your financial situation, not only would you have trouble getting approved for a new credit card, you might be careening toward a financial crisis. If your debt starts to creep up too close to your income, you’ll likely find yourself unable to keep up with payments.

The only way to reduce your DTI is to reduce your debt or increase your income. If your DTI is above 30%, make a plan to reduce your overall debt before applying for any new loans or credit cards.

4. Include all your income

This might sound crazy, but creditors use how much money you make to help determine how much you can afford to pay back. Who knew?

So that means it’s important to include ALL your income on your application – not just what you earn at your nine to five. Are you a part-time dog sitter? Snipping hair on the side? Selling homemade lip balm on Etsy? Include it.

The more honest you are, the easier it is for creditors to get a picture of your real financial situation. The key word there is real. Don’t lie about your income – credit card companies will catch on and deny you, and it’s only highly illegal.

5. Only apply for the right card

Don’t go papering the town with credit card applications. Getting declined doesn’t just cause psychological pain. It hurts your credit score, too.

So if you’re rocking a 590 credit score with a 45% debt-to-income, don’t risk another potential ding to your score by applying for that 3% cash back 0% interest platinum credit card reserved for applicants with extremely good credit. Instead, do some solid research and find a credit card that you might actually qualify for.

Some credit card companies may even offer prequalification for certain credit cards. Which means they’ll take a really basic peek at your financial situation and let you know if you’re actually qualified for the card or not. Prequalification doesn’t guarantee that you’ll get approved, but it can give you some confidence before you apply.

6. Don’t lose hope

If you do get declined for a credit card, don’t despair. A bad credit situation isn’t permanent, but it does take some time to repair.

Wait another six months to a year before applying again. Too many inquires in a short period of time can hurt your score even more. In that time, work on improving your score and overall financial picture. Focus on paying down any existing debts and make sure you’re paying all your bills on time.

If your credit picture could use some retouching, do yourself a favor and learn what it takes to improve your credit score and overall financial well-being. Start by learning the difference between good and bad debt, refresh yourself on things that don’t actually hurt your credit score and then take the steps to improve your credit.

What are you waiting for? Get reading!