What weighs 2 pounds and has the potential to jeopardize my financial future? The stack of credit card offers I received in July. For those that say lending is not rebounding, well… they don’t see my mailbox each day. I’ve received 26 offers for credit over the last few weeks, all from major lenders. What does this tell me? First … the reports of credit’s demise are greatly exaggerated. Second, we could be in for another credit boom and bust if we do not learn from the lessons of the previous recession.
For those of us that maintain healthy credit profiles, there are an abundance of financial opportunities. According to Mintel Comperemedia, credit card offers were up by 69% in the first quarter of 2011. In the first quarter of 2010, Americans received 826 million offers for credit. During the same period in 2011, mailboxes across the country have welcomed over 1.4 billion offers. Mintel goes on to report that 60% of the offers contained some type of incentive, a dramatic change from 2010 offers. Primarily, consumers who maintain a score of 720 or over are receiving these more-favorable offers, but those with lower credit scores are also witnessing an increase in solicitations.
So, what are credit card companies offering to entice customers? Well, these new incentives include cash-back, fee waivers, extended teaser rates, and the surprising return of lower interest rates. Many of the people I’ve counseled over the last few years were put off by the card industry’s adoption of the Credit Card Act as it lead to the reduction of credit lines and the increase in interest rates. Folks who were model users could not understand why they were penalized, but the industry’s reaction was foreseeable due to the new market dynamics it would face. However, as unemployment and the economy stabilizes, lenders have a clearer view of the future and are preparing to ramp up business. If you’re in the market for a credit card, this could be a great time to review these offers, but you have to take care before entering new credit arrangements. It’s a buyer’s market out there, so don’t just jump at the first offer landing in your mailbox.
Before taking on any new credit cards, it’s important to review your budget to ensure you can comfortably accommodate the obligation. As we’ve recommended in the past, it’s best to repay your credit cards in full, but at the very least you should be able to meet the monthly minimum obligation and a healthy amount above and beyond. Therefore, take some time to analyze your spending to see if a new card will adversely impact your financial situation. If you find that you can manage the new obligation, take time understand the terms offered to you. The Federal Reserve has a great website, federalreserve.gov/creditcard, which helps you understand credit card offers so that you can compare apples-to-apples. Their interactive site helps you weigh considerations such as interest rates, annual fees, rewards and other features.
Next, don’t make rash decisions with credit offers. Although you may not have received offers for the past several years, don’t let the perks make you overlook the potential cost of credit. Remember, credit cards companies are in the business of making money, and nothing is ever free. Twenty-thousand travel miles may seem like a huge “win,” but if your being charged an extra 5% to get those miles you are indeed paying for it. It’s best to compare the offers you’re receiving with those being offered on-line. Bankrate.com and CreditCards.com have wonderful comparison tool that help you determine the best card for your situation. Cards are evaluated according to their offer. You can search for cards based on a host of criteria such as low-interest rates, balance transfer, rewards, cash back, and frequent flyer miles.
Lastly, always review your credit prior to opening any new accounts. An astounding 85% of consumer credit reports contain some type of error, and you pay for what you don’t know. Credit report errors can not only disqualify you for financing, but also cost you higher interest rates. Therefore, request copies of your reports from annualcreditreport.com and review them carefully for mistakes before you consider any new financial obligations, credit cards or otherwise.