credit cards

Best time to apply for a credit card

Leslie McFaddenq_v2.gifDear Credit Card Adviser,
I don't have a long credit history since I only moved here to the U.S. about five years ago, although I do have a good and stable job. I had three credit cards. I usually pay off everything or leave a little extra. My first had about $3,000 credit limit, second with $1,500 and the last one that I had for more than a year had a $5,000 limit. I recently received a letter stating they closed the third credit card with the $5,000 limit due to inactivity. I have a zero balance with that card. I researched and found out it could affect my credit score. The only good thing is that I didn't have any balance and it was fairly new. My question is: When would be the best time to apply for a new credit card? I also requested a line increase with my first credit card, but they declined it about a year ago. Please give me enlightenment on how to go about with my situation.
-- Sam

a_v2.gifDear Sam,
I wouldn't say there's a "best time" to apply for a credit card, but you want to keep new applications for credit to a minimum. Each time you apply, the credit check generates a "hard" inquiry on your credit report, which can lower your credit score temporarily. Credit inquiries usually cost the score about five points, but can hit the score harder when the applicant's credit history is short.

You didn't say why you want to apply for a credit card. I assume you want to replace the $5,000 credit limit you lost from the closed account. From a credit-scoring standpoint, you may not need to replace the limit.

Having one less card doesn't necessarily punish your FICO score because credit limits aren't a standalone factor in the FICO scoring model -- but the amount of available credit used is. The closure of an account with a zero balance reduces your overall available credit, which can make you appear to be using a greater proportion of your credit card limits.

FICO scoring model

Low monthly balances can protect the score from big fluctuations after an account closure. You said you usually pay in full, but this doesn't mean you have zero balances. Issuers usually report the balance from your last billing statement.

Whether or not you pursue a new card, do use your remaining ones to avoid account closures and inactivity fees. Each card issuer sets its own threshold for minimum use. The company may want to see a certain dollar amount in annual spending, or a minimum number of purchases per year. For example, U.S. Bank charges annual fees on some of its cards if the user doesn't make at least one purchase every year. Citi will charge some users a $60 annual fee beginning in April, and will rebate it only if the customer spends at least $2,400 each year.

Federal law may protect you from inactivity fees before the summer ends. Earlier this month, the Federal Reserve Board proposed a rule that would amend provisions of the Credit Card Accountability, Responsibility and Disclosure Act that take effect Aug. 22, 2010. The rule would ban penalty fees on credit cards for account inactivity. The Federal Reserve will issue a final rule after a public comment period.

For now, assume that inactivity fees are a possibility and use your cards regularly. If you do plan to add a card to your wallet, compare credit cards on Bankrate.com.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more columns by the Credit Card Adviser. To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page, and select "Credit Cards."

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