Rewards credit cards can make travel cheap or even free. However not all credit card applications are approved by the banks. Some data shows that nearly 20% of all credit card applications are denied. The main reason of these denials is that banks do not want to borrow money to the clients who are risky, may get too deep into debt and then fail to repay the money they borrowed. Banks are especially careful about screening rewards credit card applications with attractive bonus offers because besides taking the risk of borrowing money to the client, banks are also paying for the bonus points that the client will get. Although different banks have different ways of screening their credit card applicants there are also certain general screening procedures that all banks use: they all check applicant’s credit score, ask about income, assets, expenses, and employment history. Besides determining applicant’s financial eligibility for a credit card, some banks also have additional criteria of determining applicant’s eligibility for rewards credit card’s bonus offer.
Credit score is the most important thing that banks consider while deciding whether to approve or deny credit card application. Credit score sums up many years of applicant’s financial behavior into a simple three-digit number which shows how the applicant was handling his or her credit in the past. Banks then assume that the same applicant’s behavior will remain in the future. Therefore someone with a recent bankruptcy, missed mortgage, car, credit card payments, and/or maxed out credit cards will have a low credit score and hardly get approved for a rewards credit card with a generous bonus offer.
Credit score consists of:
35% Payment History
30% Amount Owed
15% Length of Credit History
10% Type of Credit
10% New Credit
Payment history is the most important element in the credit score calculation formula. It looks at whether you have been making payments on your debts on time or not. It also looks how many missed payments there are in your credit history – one late payment may not have very significant impact on credit score but multiple missed payments (and especially recent ones) will. Paying all bills before their due dates is the most important thing to do for those who want to have a high credit score and plan to apply for rewards credit card because banks try to stay away from clients who don’t pay their bills on time.
Amount owed is the second most important element of credit score. It looks at what percentage of available credit you are using on your credit cards and installment loans and how close to maxing out your available credit you are. For example, if you have two credit cards with $5,000 of available credit on each one of them your total available credit will be $10,000. If you have a balance of $2,000 on one card and a balance of $0 on the second card, you owe a total of $2,000 or 20% of available credit. It is usually advised to not use more than 30% of available credit to avoid negative impact on credit score. Those planning to take advantage of credit card bonus points offers should also have a habit of paying off their credit card balances in full (NOT just minimum payments) every month because otherwise credit card interest will reduce or eliminate the value of any points earned.
Although the length of credit history is the third most important element in credit score calculation, its impact on credit score is two times smaller than either amounts owed or payment history is. Length of credit history looks at how old is the oldest and the newest accounts on your credit report in addition to the average age of all credit accounts that you have. It usually takes at least a few years to build a good credit score and the more years of well managed credit you have the better your score will be. Those without any or with very limited credit history will not be approved for rewards credit cards with the best bonus offers. A lot of people start building credit histories with simple cash back credit cards or even with secured credit cards where they put some money as a security deposit and then use the card as a regular credit card.
Agencies that calculate credit scores like to see variety of types of credit. If your credit history includes different types of credit accounts (credit cards, mortgages, retail accounts, installment loans), your score will be slightly higher than someone’s with only one type of accounts. However it is not worthy to open a new account with the purpose of diversification of your credit accounts because the impact of this credit score element is very small.
New credit also has an insignificant impact on your credit score; credit inquiries during the last 12 months and recently opened new accounts affect this credit score element. Although applying for and/or opening multiple credit accounts in a short period of time can be considered as a sign of higher risk, my credit score drops only by a few points after I open a new credit card account and a month or two months later the score is back to where it was before the opening of the new account.
To be approved for a rewards credit card with a generous bonus points offer you credit score in most cases has to be around or higher than 720 (out of 850 possible). Therefore knowing your credit score before submitting a credit card application is important. It is easy to check your credit score as many banks offer free online credit scores to their clients today (usually available via online bank account management).
Other things that banks consider during credit card application process
To determine your eligibility for a credit card banks not only consider your credit score but also look at your overall financial situation by asking questions about your income (from employment, investments, etc.), assets (savings, checking, brokerage, retirement accounts, CDs, etc.) and expenses (rent, mortgage, car and other payments). Most banks also ask for the name and contact information of your employer and how long you have been with the company. Even if your credit score and income are high but you have no significant assets and your entire income is spent to cover living expenses and to make payments on loans, your rewards credit card application may still be denied because bank will be concerned that you will get even deeper into debt and soon be unable to make timely payments on your debts. On the other hand, even if your income is low, credit score is excellent, you have little or no debt and live frugally there is a very good chance that your rewards credit card application will be approved.
Determining your eligibility for rewards credit card’s bonus offer
Most banks have rules in place to prevent people from frequently opening and frequently closing credit cards with the purpose of getting the same bonus offers multiple times.
For example, American Express and Barclays allow receiving bonus for the same credit card only once (however it appears that sometimes they make an exception for some clients – I have received American Express Premier Rewards Gold bonus three times and Barclays Arrival Plus two times but my second and third applications were made after I had received invitation to apply letters with invitation codes from both banks).
Chase has their so-called 5/24 rule which means that you will not be approved for most their credit cards (especially the ones with the most generous bonus points offers) if you have opened 5 or more credit cards (at any bank, not only Chase) within the last 24 months.
You will not be eligible to receive bonus from a Citi Bank credit card if you have opened or closed a card from the same “family” of Citi cards during the last 24 months. For example, you will not get Citi ThankYou Premier bonus if you opened or closed this card, Citi ThankYou Preferred or Citi Prestige card within the last 24 months.
Eligibility for bonus offers details can be found in the rules and conditions of each offer.
Marius Z., the author of the Heaven-Bound Pilgrim is writing about travel to holy places in Israel, Italy, Poland, France, Lithuania, Spain, Portugal and other countries. He writes about how to travel to the holy places cheaply or even for free while using credit card rewards points, frequent flyer miles, and hotel rewards points. History and spiritual message of each holy place is presented along with the information on where to eat, shop and stay while on pilgrimage.