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Opening a credit card is a big deal for your finances. Here’s how to tell it’s not the right move for you right now.
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There are some good reasons to open a credit card. One of the best reasons is that a card can help you build credit. Your credit utilization ratio and payment history are two huge factors in determining your credit score, and both can be positively impacted by getting a card, maintaining a reasonable balance, and paying your bills on time.
You can also earn rewards if you sign up for the right card, so you get cash back, miles, or points for merchandise based on spending you’d do anyway.
But while there are benefits to getting a card, not everyone should move forward with applying for one. You don’t want to do so before you’re financially ready. Here are three big signs that this may be your situation.
1. You already have a lot of high-interest debt
If you already have a lot of high-interest debt, dealing with what you owe could be smarter than signing on for new credit. For example, if you have payday loans, you’ll want to focus on paying those off first before you take any chances of digging a deeper hole for yourself. Paying off existing debt could also help you maximize the chances of qualifying for a good credit card with a generous rewards program.
Now if you have low-interest debt such as a mortgage loan or even an affordable car loan, this shouldn’t preclude you from opening up a credit card. If you’ve been responsible with making payments on those loans on time, this positive track record indicates you may indeed be ready to handle the responsibility of a credit card.
2. You have trouble keeping track of your current financial obligations
If you don’t know where the money in your checking account is going, if you overdraft your account regularly, or if you are late paying bills, then you don’t want to get a credit card.
A single late payment on a card could cause your credit score to drop by 60 to 110 points if your bill becomes 30 days past due. Your score will drop more if you’re repeatedly late or if you are 60 or more days behind on the bills. You’ll also get hit with late fees if you are late paying your card.
There’s no reason to risk these undesirable consequences by taking on a new financial obligation when you haven’t yet managed to learn how to handle the responsibilities you have already. Instead, focus on finding a system that works for you, such as using an app to track your bills or setting up automatic payments so you can be on time every time.
3. You don’t have a handle on your spending
If you aren’t living on a budget and you don’t trust yourself to not charge things on your credit card you can’t pay off in full, you should avoid getting a card. The average interest rate on a credit card was 21.19% as of August 2023. The last thing you need is to get a card, charge up a balance you can’t pay back, and get stuck paying interest for years at such a high rate.
Before you get a card, make sure you can use it wisely by limiting the amount of your available credit used to under 30%, paying your bills on time, and not charging more than you can afford to pay back in full when the statement comes due. If you don’t think you can do all that, wait to get a card until you’re confident you can.
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