Get a Credit Card when You Have a Low Income

We all know that building credit is an important component of financial security, but if you have a low income it can be difficult to get a credit card in the first place. While obtaining a credit card is mostly determined by your credit history and income, there are some adjustments you can make to increase your chances of getting your application approved.

Steps

Maximizing Your Qualifications

  1. Make sure you're including the right people. Credit card companies want to make sure that a debtor will be able to pay off any debts that accrue while they have an account. For this reason, they will ask about your income. Be sure that you're including all of the right people when you count your income.
    • Although applicants can no longer count their "household income" when applying for a credit card, if you are married, you are allowed to count you and your spouse's joint incomes (as long as their income is available to help you make payments). Just remember, more people usually means more income, and the more income you have, the more easily you will qualify for a card.
  2. Don't forget about your side jobs. If you make more money, you seem like less of a credit risk, because you have more of it to repay your debts. A lot of people work gigs and side jobs throughout the year to make a little extra money. You are entitled to include all of your income, and not just your primary source of income, when you are applying for a credit card. Whether that is a musical gig at the local bar or mowing your neighbors' grass, if it brings in money, it counts.
    • Also remember to include alimony, government benefits, investments, and child support.[1]
  3. Reduce your expenses. The fewer standing expenses you have, the more money you have to pay for your credit card. If you have a car payment, consider trading in for a less expensive model. If you rent furniture and appliances, purchase them instead, even if you have to buy your furnishings one by one rather than in sets. Consider refinancing your home to reduce your mortgage payment, or relocating to a less expensive property if you rent.
  4. Consolidate the debts you do have. If you already have credit cards, consider transferring some of the balance of higher interest cards to lower interest ones, saving you money on interest. The less you spend on interest, the more money you have, which makes you seem like less of a credit risk. While it's best to split your balances among different credit cards, you can still minimize the interest you're paying.[2]
    • Make sure your debt to limit ratio is low on every card. If you have $500 of debt on your American Express card with a $1,000 limit, your AmEx card has a debt to limit ratio of 1:2. If you have $300 of debt on a Visa card with a $4,000 limit, your Visa card has a debt to limit ratio of about 1:13. You don't want to appear to be maxed out on any one card, so if you find yourself in a situation like this, you should move $400 of debt on your AmEX card over to your Visa card so that your new ratios are 1:10 and about 1:5.[3]
  5. Open a checking and savings account. Your potential creditor wants to know that you have a viable way of paying the bill, and without a checking account, that's very difficult to do. The credit card application will ask you if you have one or both, and having both is really good; it makes them think that you must have money leftover, tucked away in case of emergency.

Determining Where You Stand

  1. Learn about your credit status. Before applying for any type of credit card, you need to know what your prospective creditors will know. The most important factors for obtaining credit cards, are your credit score, debt-to-income ratio, along with certain information in your credit report.
  2. Find out your credit score. Your credit score is a numerical value derived from the information contained in your credit report.[4] A credit score can fall anywhere from 850-300, with 850 being the best credit risk and 300 being the worst. Any score over 700 is considered very good, but nearly 20% of US consumers have scores above 800. [5]Since different cards are targeted towards consumers in different credit ranges, it is important to know your score before you apply for a credit card. The different factors determining your credit score are weighted as follows:[6]
    • Payment history: 35%. Whether or not you paid credit bills on time is the single most important factor in determining your score. Credit cards, retail accounts, installment loans (like car payments), finance company accounts, and mortgage loans are the type of credit account that factor into payment history. Late payments, wage garnishments, foreclosures, and liens all negatively affect this component of your credit score.[7]
    • Amounts owed: 30%. This includes total amount owed, and the amount owed on different accounts. Generally, it's better to have a small balance than none at all.[8]
    • Length of credit history: 15%. The longer the better.
    • Types of credit: 10%.
    • Number of new accounts: 10%. Opening up many new credit accounts at once can be a red flag, so its best to avoid it if you can.
  3. Obtain a credit report from one of the credit bureaus. You can use either Experian (888-397-3742), Trans Union (800-916-8800), or Equifax (1-800-685-1111). You can also take advantage of http://www.annualcreditreport.com to obtain your free yearly report.
    • Check the report for inaccuracies. A 2013 study by the Federal Trade Commission found that one out of four consumers have errors on their credit reports that affect their scores, and one in twenty had a serious error on their report.[9] Therefore, taking this step is crucial.
    • If you have a low credit score, there are things you can do (or avoid) to improve your score.
  4. Dispute any inaccuracies. If you do find an inaccurate item on your credit report, you do have some recourse. First, write a letter disputing the item with the credit reporting agency, forwarding any supporting documents along with your dispute letter. The credit reporting agency will investigate, contacting whatever agency is listing the negative item. Many times, this will resolve any issues. If it does not, then follow the same procedure directly with the agency listing the negative item.[10]
    • To ensure that your dispute letter arrives where it should, it is best to send your dispute letters by certified mail.
    • If, after filing dispute letters with both the credit reporter and the company or agency listing the negative item, you still cannot have the item removed, you may pay the credit agency to add the dispute plus the supporting documents to your credit report. [10]
  5. Calculate your debt-to-income ratio. Your debt-to-income ratio is calculated by adding up all of your monthly debt payments, and then dividing them by your gross monthly income. It's what tells a potential creditor how much money you have to pay any debt you incur with them. The lower your debt-to-income ratio, the more willing a creditor will be to extend credit.[11]
    • So, if your mortgage was $1000, your student loan payment $500, and your car payment $500, you would have $2000 in monthly debt payments. If you made $4000 a month, then your debt-to-income ratio is 50%.

Applying for the Right Type of Card

  1. Apply for a credit card. Now that you know your credit score, your debt-to-income-ratio, and have an accurate credit report, you have the information you need to apply for the right type of card. There are many creditors who service the low income market. Consumers in the US can find a sample listing here, and Australian consumers can find a comprehensive list here.
  2. Consider a partially secured credit card. A partially secured credit card can sometimes be the best option for low income earners. With a partially secured card, the applicant pays a deposit (less than the credit limit) to the card company, thereby securing the debt. Then, the cardholder uses the card like normal, and pays the card off like normal. When you close the account, you get back the deposit.[12]
  3. Consider a fully secured credit card. If you don't qualify for a partially secured card, consider a fully secured one. The credit limit will be equal to the deposit, but the fees and interest rates are usually better on a fully secured card than a partially secured card. As long as you make sure to get a secured card that reports to the credit reporting agencies, then you will be building credit at little to no risk for the lender.[13]
  4. Ask a friend or family member with strong credit to cosign. A cosigner agrees to pay any outstanding debt you cannot pay, which can make you more appealing to the card company and help you build up better credit. Be aware that you are risking your friend or family member's credit score when they cosign, so make sure you are responsible with your spending and your payments.[14]
    • Talk to the person you want to cosign on your credit card and discuss ground rules for their participation.[14] Set up email and text alerts to remind you to pay on time, or agree that you will not spend more than 30% of the monthly limit.[14]

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Sources and Citations

  1. ↑ http://www.lowcards.com/credit-card-companies-verify-income-34186
  2. ↑ http://www.lowcards.com/faq#cc6
  3. ↑ https://www.nerdwallet.com/blog/credit-cards/credit-card-offers-lowincome-earners/
  4. ↑ http://money.usnews.com/money/blogs/my-money/2013/04/22/credit-report-vs-credit-score-do-you-know-the-difference
  5. ↑ http://money.usnews.com/money/personal-finance/articles/2012/12/28/what-it-takes-to-have-a-perfect-or-near-perfect-credit-score
  6. ↑ http://www.myfico.com/crediteducation/whatsinyourscore.aspx
  7. ↑ http://www.myfico.com/CreditEducation/Credit-Payment-History.aspx
  8. ↑ http://www.myfico.com/CreditEducation/Amounts-Owed.aspx
  9. ↑ https://www.ftc.gov/news-events/press-releases/2013/02/ftc-study-five-percent-consumers-had-errors-their-credit-reports
  10. ↑ 10.0 10.1 http://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports
  11. ↑ http://www.consumerfinance.gov/askcfpb/1791/what-debt-income-ratio-why-43-debt-income-ratio-important.html
  12. ↑ http://www.cardhub.com/best-credit-cards-for-bad-credit/
  13. ↑ http://www.nerdwallet.com/blog/top-credit-cards/nerdwallets-best-secured-credit-cards/
  14. ↑ 14.0 14.1 14.2 http://www.nerdwallet.com/blog/credit-cards/credit-score/rules-cosigning-credit-card/
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