Should I Apply for a New Credit Card During COVID?
The COVID-19 pandemic has created record unemployment, erased profit margins, closed businesses and wreaked havoc on almost every family’s money outlook. It has even affected America’s ultimate get-out-of-jail financial symbol — the credit card.
How’s the credit-card business? In a word — uneven.
How Americans Are Handling Debt & Credit Cards During the Pandemic
Consumers are carrying smaller balances and applying less often for new cards. And the credit-card companies — feeling their way through the pandemic and the accompanying financial shakiness — have made those omnipresent offers more difficult to obtain.
The Federal Reserve Bank of New York said that credit-card balances were reduced by $76billion (8.3%) in the second quarter of 2020, the steepest decline since the Fed began compiling such data. New credit-card applications were down 40% in the second quarter, according to the Consumer Financial Protection Bureau. Even consumers with super prime credit scores (above 780) were down 59% in new applications.
It’s an indication that American discretionary spending has pulled way back — or the upper crust is simply relying on savings and other income streams — as families brace to weather the pandemic’s uncertain timetable. While banks are enticing new customers by offering debt consolidation and longer-term, zero-interest cards, the credit-card companies would normally continue to lower their limits for new cards and roll out an array of flashy-sounding perks.
But companies have cut back as well. In normal times, banks and credit-card companies distribute about 200 million 0% APR offers for balance transfer cards … per month. This summer, that number dropped by a rate of almost 75%, according to data from Comperemedia, a firm that studies marketing data. Companies are hedging their bets, reserving the offers for people with excellent credit, since there is so much uncertainty with employment and finances. Even the best of customers might be out of work these days. The shift could also prompt an increase in accessibility of personal bank loans (there will be interest, but likely at a much lower rate).
If you are targeted by the new deals and offers from companies clamoring to reclaim some business, there has seemingly never been a more attractive time to add a card (or two). Some companies, while cautious, also see an opportunity to add new customers and perhaps generate some effective public relations by offering a lifeline to struggling families.
If you have the new-card opportunity, it also begs the question:
Is It a Good Time to Apply for a Credit Card?
The pandemic has changed everything. But in sound financial terms, it has actually changed nothing at all.
In you’re on solid financial ground, credit cards represent flexibility. They are more convenient than cash and the best option when paying online or over the phone. More and more, particularly with delivery of food or household goods, digital payments are the only option. Cards can also provide added benefits through partnerships with hotel chains or airlines.
But the availability of credit cards can be a curse for someone who struggles to maintain financial stability.
You should consider applying for a new card — pandemic or otherwise — if you meet these conditions:
You have good credit: You will qualify for the best credit cards, while raising chances for 0% promotional financing, always a good quality during challenging financial times.
You have no credit-card debt: There’s no need to add more potential bills to other cards you already must pay off. If the slate is clean, credit cards can work to your advantage.
You have an emergency fund: An emergency fund is a great safety net if there are unexpected expenses — and isn’t the unexpected actually expected these days? — that will always allow you to regularly pay off your credit-card balance and avoid high-interest debt.
Reasons to Avoid Applying for a New Credit Card
On the other hand, you should think carefully about applying for a new card — pandemic or otherwise — if any of these scenarios sound familiar:
You are a big spender: If you generally spend beyond your means, a new credit card simply gives you more license to overspend and dig yourself into a deeper financial chasm.
You can’t pay off your current credit-card debt: Of course, this is the ultimate red light. Adding more cards to a shaky situation is a recipe for financial disaster. A balance transfer card could help your debt, but it doesn’t solve the likely actual problem of undisciplined spending.
You recently applied for other credit products: New applications mean a hard pull of your credit (a temporary drop of up to 10 points on your FICO credit score) and that’s not a good habit.
You will apply for a mortgage or auto loan: Again, it’s a bad idea to have a hard pull of your credit during these major purchases because you will greatly decrease chances to get the best rates.
You are facing a furlough or you lost your job: Regardless of how desperate you are to pay the bills, a reduction of income will make you a less desirable candidate because lenders will know about your compromised ability to repay debt.
There are indications that consumers have managed their credit-card bills effectively during the pandemic. Perhaps because of stimulus aid from the federal government or maybe temporary bill-paying forgiveness, TransUnion said loans past due by 90 days or longer, fell to 1.47% in the second quarter, a decline of 24 basis points from the same period in 2019. Will the enticement of new credit-card offers skew that equation? Will harder-to-obtain cards alter the dynamic? Pandemic or otherwise, some financial principles won’t change.