Hidden Reality of Credit Cards
Customer acquisition for credit card companies has evolved into a rat race in which even the tiniest chances to attract customers are not overlooked. Pre-approved credit cards are an example of this. If you check every email we are sure that your inbox column would have at least two to three offers of such credit cards from three to four different banks. These deals are received by almost all of us. But what exactly should be done with these offers? Should we condemn them outright or do we go for it? But do you know that between the hasty acceptance and rejection decisions, there is another path to take: information and study. Keep reading to understand the hidden reality of pre-approved credit cards, the advantages, repercussions, and misconceptions surrounding the same.
Be Doubtful, Not Debtful
It's important to first understand the product, its flaws, and what it can do for you in the long run. Credit cards are so widely available these days that it's tempting to ask if shopping with a plastic card is more addictive or other narcotic addictions. The reality is that every highly beneficial product has a flaw that, if exploited, can leave us in a ditch. So, before you get one of these pre-approved credit cards, hang on and learn a little about them.
What is a Pre-Approved Credit Card
A pre-approved credit card will be offered to you by your credit card issuer or bank. There is no guarantee that you'll get it. In fact, it means that the credit card company or bank has combed through CIBIL score databases and the list of people who are qualified for a credit card.
As a result, an automated mailer is sent to people with high CIBIL scores as a lure to bait you in as a customer with a pretty worm known as a pre-approved credit card. If you proceed, the bank or credit card agency may perform another round of credit history evaluations. If they do not deem your credit history to be satisfactory, your application will be refused, potentially lowering your CIBIL score. If your application is refused, you will end up taking two steps backward.
Can Pre-Approved Credit Offers Be Further Hazard?
Here are several reasons why you should think twice about applying for additional credit cards, regardless of how good your CIBIL score is:
Low-interest rates and lifetime free cards are popular marketing gimmicks used by issuers and banks to lure customers into what appears to be “easy access to money.”
- For the time being, “annual payments are being waived,” which is very different from what the promise of free for life means to a consumer. However, the no-annual fee discount is just temporary. It’s all up to the discretion of the bank.
- The “annual percentage rate” also increases to between 36% and 40%. The fact that other interest rates are low makes no difference because all banks pay reasonable rates to remain competitive in the rat race.
Preapproved credit cards can also lead to the following scams:
- Expiration dates are approaching.
- Unwillingness to disclose terms and conditions
- Insufficient contact details
- Before getting the pass, you must make large upfront payments.
Should You Say Yes?
Both Credit cards and preapproved credit cards have benefits and drawbacks. Check the two reasons stated below to learn when to say yes to a credit card:
- If you are not happy with your new credit card in terms of cashback and rewards when paying your bills on time, you should consider switching. If the bonuses and other advantages are worthwhile, these credit cards can be helpful. However, extensive research is needed.
- Preapproved credit cards are particularly beneficial to people with high CIBIL ratings. However, if you need a second credit card for some reason other than to pay off your existing credit card debt, These deals could be beneficial in the long run and are worth applying for.
However, apart from these two situations, it’s important to remember two more things while responding to these deal mailers: Your current credit situation and credit score, as well as what the credit card offers and its reliability. So go for it, but do so with caution!
Credit Card Misconceptions Among People
There are certain misconceptions that people hold. They don’t actually know the real reason and logic behind the situation. We took it on ourselves to clear their misconceptions and provide them with factual and logical explanations.
Misconception 1: It Isn’t Good to Have Multiple Credit Cards.
One of the main worries about getting multiple credit cards is the effect on your credit score. This is a common concern among people. They fear that if they apply for multiple credit cards, it will adversely affect them.
The fact, however, is that owning multiple credit cards has both positive and negative effects. However, getting multiple credit cards will actually improve your credit score by making it easier to maintain a low debt utilization ratio.
For instance, if you have one credit card with a $2,000 credit limit and spend $1,800 on it on a monthly basis, your debt utilization ratio, or the percentage of your usable credit that you use, is 90%. When it comes to credit ratings, a high debt usage ratio can lower your ranking. It might not seem fair—why should you be penalized for using the majority of your credit limit if you only have one card and pay it off in full and on time every month? But that’s how the credit score system works.
But understand if you don’t have such high usage and have multiple credit cards, it will adversely affect you. Your debt utilization ratio will be low, and the yearly/ monthly fixed bills of the same will be high.
Misconception 2: Credit Utilization Doesn’t Play a Role in Credit Cards
It is rightly said that it is a misconception because it is one of the essential determinants. Therefore, one must keep their credit line utilization ratio below 30% and stay on top of payment deadlines. Most credit experts advise against using more than 30% of your available credit per card at any given time in order to increase your credit score.
It’s also easier to keep your credit utilization ratio down by spreading your $1,800 in transactions across many cards. This ratio is only one of the variables considered by the FICO credit scoring model in the “amounts owed” part of your ranking, but it accounts for 30% of your total credit score. Only 35% of your payment history is taken into account when calculating your credit score.
How Many Credit Cards Should You Have?
People usually come up to us and ask how many credit cards are the best options. Now there is no magic number to that question because everyone’s situation is different. A strong argument can be made to have at least one credit card to take advantage of the inherent convenience, security, and other benefits.
If you need the extra credit lines to accommodate your monthly spending budget then the demand and requirement of credit cards are justified. Alternatively, if you want to use your daily spending you can collect incentives such as cash backs, points, or airline miles.
How Many Credit Cards Are Too Many?
The answer to such questions is never definite. For some people, even getting two credit cards can be excessive. Remember, if you can’t afford to pay your bills, you don’t need them and therefore refrain from using them. Getting a new credit card will help your credit score by lowering your overall credit line usage, but getting many cards in a short period is not recommended.
Many card issuers have rules in place to address this practice, which has emerged as a result of consumers attempting to cheat the system by signing up for several credit cards in order to collect incentives and then canceling after the spending criteria have been met. For example,
Chase, America’s leading bank, has a policy known as 5/24, which states that if you’ve applied for more than five credit cards (regardless of the issuer) in the previous 24 months, you won’t be eligible for anymore.
Another such disadvantage of getting a large number of credit cards is that it can make you seem risky to lenders, lowering your credit score. Even if you’ve paid them all off, the simple fact that you have a lot of open and unused credit lines will make you appear to the next lender as a possible liability. Although there is no absolute limit on how many credit cards you can get, it’s better to apply for and hold only the cards you need and support using based on your credit scores, willingness to pay balances, and rewards goals.
Should We Carry Credit Cards for Emergencies?
According to us, it would be ideal if you didn’t need to use your credit card in an emergency and instead had enough money in a liquid account, such as a savings account. When you’re on holiday and don’t have enough money to cover a car repair or some form of unexpected cost when you’re away from home, a credit card can come in handy. Other circumstances, such as an unexpected medical bill or losing your work, can quickly deplete any emergency savings, so getting at least two or three credit cards can come in handy in a pinch (the present Covid-19 pandemic being a good example). These cards should ideally have no annual charge, a high credit limit, and a low-interest rate.
Our final thoughts on the hidden reality of credit cards are that using many credit cards has a lot of advantages, but only if you use them responsibly. So, be aware of the benefits each card provides, the credit limit on each account, and, most importantly, the payment due dates to ensure that having multiple credit card accounts works for you rather than against you. Be aware of all marketing grimaces and take help from credit experts from an organization running for your benefit. If you didn’t find anyone worth your trust, come to Atlanta Credit Experts and get the solutions to all your financial worries.