5 Things To Understand About Credit Before Applying For Cards

Credit Cards are one of the easiest and quickest ways to earn points and miles - from sign-up bonuses to earning points on everyday spending and even getting some pretty neat perks on top of it all. It's easy to get carried away with all of the options that are available, and it seems like issuers are coming out with new and better sign-up bonuses all the time. However, there are some definite pitfalls to the credit card game, so you have to play smart in order to come out ahead. The rules for understanding how your credit score works aren't that difficult, but it does take some time to understand what's involved and how your score can be impacted.

No matter if you're new to the travel-rewards game or a seasoned rewards traveler, there are some things you need to know to ensure you can maximize rewards credit cards that can get you traveling around the world for nearly free. Here are the five things you need to understand about your credit:

1. Know Your FICO Score

After your Social Security number, your FICO credit score is perhaps the most important number assigned to you - not to mention the most important part of your credit history. Yet, many people don't know where to look for it. Because it's such a vital part of your credit, you should know what goes into determining the score and what yours is to make sure there are no errors. There are a number of ways to check your FICO score for free, as well as utilizing AnnualCreditReport.com, so that should be one of the first things you check before applying for a rewards credit card.

Your FICO score is used by most lenders to determine your creditworthiness, but it by no means guarantees a decision. Even if you have a perfect score, you could still get declined for a specific card - and in that case, you're best off calling the company for reconsideration. As you can see in the chart up top, your FICO score is comprised of: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% types of credit used. By maintaining your FICO score, you'll be well on your way to getting approved for a rewards credit card and start earning points and miles.

2. Don't Carry a Balance

This is pretty straightforward: If you carry a balance on your credit card, your score will drop. And, the interest paid will negate the value of any miles and points you earned on the card. Despite those obvious downsides, according to a 2014 Gallup poll on credit card use, about half of all American users carry a balance on their cards at least some of the time. And while these numbers have declined over the past 10 years, about one-third of credit card users still say they carry a credit card balance every month. To me, that's crazy! If you're going to get a travel rewards credit card - especially a charge card - it's extremely important to pay your statement off in full to make sure you're not only keeping your FICO score in check but also maximizing your rewards output.

There are plenty of cards with 0% intro APRs, such as the Capital One VentureOne Rewards Credit Card (0% APR for 12 months and 13.74%-23.74% variable APR after that on purchases), the Capital One Spark Miles Select for Business (0% APR for 9 months and 14.74%-22.74% variable APR after that on purchases) and the Chase Slate (0% intro APR for 15 months then 16.74%-25.49%variable APR after that), which also has a $0 introductory balance transfer fee when you transfer a balance during the first 60 days your account is open. You must get rid of your credit card debt before getting new credit cards. If you'll be too tempted to spend beyond your means if you have new credit cards, then they're not for you.

3. Know Each Issuer's Rules
Knowing the rules and requirements of each issuer is an important part of being successful with rewards credit cards. Each issuer has different rules that are important to keep in mind as far as benefits for sign-up bonuses and other perks. For example, Chase will not let you get Chase Sapphire Preferred, Chase Freedom, or Ink Plus if you've got five or more cards in the past 24 months. So, it's best to start with the Chase trifecta that earns you transferable points before you get a bunch of other cards, as you know you'll have those three without having to worry about the issuer's five-card restriction in the future.

Other issuers have specific restrictions as well. For example, American Express tightened up its welcome bonuses in 2014 to allow cardmembers to receive a sign-up bonus only once, whereas it used to be that you could get the sign-up bonus again if you canceled a card and didn't have it open for at least 12 months. I'd suggest looking at which sign-up bonuses will give you the most bang for your buck and applying for your high-priority cards sooner, as well as spacing your applications out.

4. Don't Bite Off More Than You Can Chew

Minimum spending requirements can add up quickly, which is important to keep in mind when you see an amazing sign-up bonus and don't take into account the amount of money you have to spend in order to get those points. In the past, we've seen some pretty astronomical sign-up bonus minimum spending requirements, such as the 100,000-mile sign-up bonus for the Citi / AAdvantage Executive World Elite Mastercard after spending a whopping $10,000 in the first three months (the offer has since dropped to 50,000 points after spending $5,000 in the first three months).

It's important to not get caught up in the flashy sign-up bonuses without thinking about the pressure you're putting on yourself financially to meet the spending requirements. There are many ways to reach that requirement, such as by purchasing gift cards and using Venmo, but it could also cost you if you don't meet the mark. When you sign up for a credit card, the clock starts ticking when you get approved and not when you activate a card, so plan accordingly. Another thing to take into consideration is that the annual fee you might have to pay on a credit card does not count toward the minimum spend requirement. Don't bite off more than you can chew when it comes to minimum spending requirements - it's not worth it, in the long run, to jeopardize carrying a balance and stressing you out financially.

5. Personal vs. Business Cards

One of the most common misconceptions about rewards credit cards is that there's a huge difference between personal cards and business cards and that you have to own a large business in order to get a business card, which is entirely untrue. In fact, business cards are meant for small businesses - even ones that are just starting and want to separate business expenses from personal - as well as for individuals to use on a personal level. Just because a card is labeled as a business card shouldn't stop you from applying. Business sign-up bonuses can be huge, and the benefit of opening a business credit card is that even though it'll count as an inquiry on your personal account, the credit line will sit on a business credit report. So, it will not affect utilization on your personal line, which - as we learned above - is a huge factor of your credit score.

It's worth noting, though, that business credit cards are not protected under the same consumer protection laws, and APRs are generally higher. But, again, you shouldn't be carrying balances on points-earning cards anyway. I'm a big fan of the Chase Ink Plus, The Business Gold Rewards Card from American Express OPEN and the Starwood Preferred Guest Business Credit Card from American Express, although there are many business cards that can be great for personal use. Don't shy away from signing up for a business card, as they can offer you huge sign-up bonuses that are oftentimes worth signing up for.

Bottom Line:

No matter if you're a beginner in the points and miles hobby or a seasoned award traveler, there are some things that are definitely worth knowing before signing up for a new credit card. I can't stress enough how important it is to keep track of your FICO score, as it's the leading determinant of your creditworthiness when applying for a new card. That being said, you never want to carry a balance, especially on a charge card, and you shouldn't bite off more than you can chew when it comes to minimum spending requirements. It's easy to be distracted by big sign-up bonuses, but always keep an eye out for the best deal available, whether that be a personal or business card, and keep track of each issuer's rules. By keeping these points (no pun intended) in mind, you should be well on your way to credit card approval and traveling around the world for nearly free!