Credit Score How Credit Works

How Credit Card Companies Use Your Credit Scores When You Apply for New Accounts

Written by John Ulzheimer

Credit card issuers, like most other lenders, rely heavily on credit scores to help them determine the risk of doing business with new applicants. Therefore, if you are considering filling out an application for a new credit card it’s important to first understand the impact your credit scores will have upon the process. Here’s how it all works…

  1. The Application

You may not have read the fine print but when you filled out your credit card application you gave the lender permission to pull your credit reports and credit scores. In general, most credit card issuers will only pull one of your credit reports and scores from one of the credit bureaus. That particular report and score will be reviewed by the lender and used to determine whether or not they will do business with you. If your report and score are not so hot then the lender might decide that doing business with you is too risky and, if so, deny your credit card application or make a counteroffer for a less attractive product, like a secured card or prepaid debit card.

  1. Setting the Terms

If your credit reports and scores are strong enough to meet the lender’s qualification standards and you are approved for the new account then your credit information will be used a second time to help the lender set the terms of the newly opened account. Card issuers typically do not offer the same interest rate and the same credit limit to all of their customers in a “one size fits all” scenario. Instead, lenders use a process known as “risk-based pricing” where the pricing of your card will be based on the risk posed by the application.  The better the risk, the better the deal.  The higher the risk, the higher the interest rate and the lower the credit limit.

Credit Card Tips

  1. Know Your Score Before You Apply

Applying for a credit card will result in a hard inquiry appearing on at least one of your three credit reports. Inquiries only account for a small percentage of your credit scores, but hard inquiries do have the potential to lower your credit scores. Therefore, it is a wise practice to only apply for credit card offers for which you are likely to qualify. Note: just because you receive a “preapproved” credit card offer in the mail does not automatically mean you will qualify for a new account, though the odds are certainly in your favor.

In order to determine whether or not you are likely to qualify for a credit card offer you will need to know both (a.) the lender’s qualification standards for the card offer and (b.) where your credit reports and scores stand. Thankfully there are many websites where you can instantly access your credit reports and scores for free. Of course, the credit score you pull online will probably not be an exact match of the FICO or VantageScore credit score the lender ends up pulling pursuant to your application. Even so, having a general knowledge of where your credit scores stand can be very helpful. For example, if you pull your credit scores online and you see that they rank as “poor” then it’s probably a good idea to consider applying for only subprime credit card offers until you can make steps to improve your credit. If your scores are very strong then you know you’ve got many more primo card options from which to choose.

  1. Ask for Better Terms In the Future

If you receive an adverse approval for a new credit card (i.e. you were approved for a card but did not qualify for the lender’s best terms) you may still be able to receive better terms down the road. Take steps to work on improving your credit, never carry a balance on your credit card accounts from month to month, and always make your payments on-time. Follow these tips and your lender may consider lowering your interest rate and/or raising your credit limit sometime in the future.

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John Ulzheimer

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