What to consider before applying for new credit as interest rates rise

Many US consumers are just getting started on their credit journey, according to a new TransUnion study. The recent credit bureau survey Strengthening Credit Participation: A Deeper Look at New-to-Credit Consumers shows that in the United States, 5.8 million consumers will open their first credit product and become new-to-credit (NTC) in 2021. And another 3 million will become NTC in the first half of 2022.

While 46% of US consumers say having a convenient way to spend as a primary reason for opening their first traditional credit product, access to credit products more than covering occasional expenses.

“A credit card is a unique product,” said Charlie Wise, co-author of the study and head of global research at TransUnion. “It offers many benefits, but the two main ones are a way to transact and the second is a way to borrow.”

What is a “new-to-credit” consumer and what types of credit products do they use?

New-to-credit consumers are consumers who are just entering the credit market for the first time. According to the study, Gen Z makes up the largest share of this NTC group (59%), followed by Millennials (21%), Gen X (12%), and Baby Boomers (7%).

For US consumers, the most common first product across the board is a credit card, and the main reason for opening an account: the new costs that accrue. The second and third most popular primary products are auto loans and private label cards.

Some consumers may choose to use their credit card for the various transactions that they may have throughout the day-to-day spending, but some use it as a starting point to build a long and positive credit history that will be approved by future lenders.

These products can be easily obtained, but the spending power that these products can be afforded by new consumers is likely to be on the lower end.

“If you don’t have a track record, it’s unlikely that the card issuer will give you a $10,000 line,” says Wise. “In most cases you will receive $500–$1,000. As an uncertain line, they will give you a relatively short leash to give until you can prove your track record.

Why access to credit matters

Many report that some credit products, especially mortgages, are considered inaccessible. Financing larger financial milestones such as buying a first home is still recognized as a key driver of construction. long term wealth. Without access to credit products, less affluent consumers may face additional barriers to meeting these goals.

“It’s no surprise that lenders are generally conservative, it’s very rare for them to make a mortgage available to someone with no credit history,” Wise said. “Many consumers, especially those new to credit, know that the road to home ownership and taking out a mortgage to buy a home means you have to build that track record, have to you start somewhere.”

A positive credit history and tall credit score Lenders are often rewarded in the form of higher credit limits and loan amounts, more favorable repayment terms, and lower interest rates. But building this credit profile takes time and requires that you manage your credit responsibly by making on-time payments, avoiding applying for new credit too often in a short period of time, and staying your credit utilization is low.

“Over time, as consumers get older, their limits increase. In some cases, the usage increases, but in some cases, they are able to expand their limits to the point that they are able to keeping their utilization rates relatively low,” Wise said. “As a rule of thumb, it’s a good idea for consumers to keep utilization rates below 30%. That shows positively in their credit scores. And if they can keep it lower, even better. ”

What you need to know before opening a new credit product

Before considering a new credit product, it’s important to evaluate your current financial situation and determine whether accessing new credit will help or hurt you in the long run.

  1. Check your budget. Before you apply for a new loan or credit card, it’s important to understand how the fees associated with that product affect your budget and how much you can comfortably pay each month. “Saying, ‘hey, I’m going to spend money now and worry about it later’ is not a good strategy,” Wise said. As an NTC, you may be tempted to spend more than you can afford at the end of the month and end up with a unmanageable debt spiral. Having a plan before you spend any money will ensure that you don’t put yourself in a bind.
  2. Read the fine print of the credit product you are considering. The TransUnion study found that high interest rates are a major reason for rejecting credit card offers among consumers in all regions. While this may be a reason to reject an initial offer, it is important to note that your credit card APR may change and NTC consumers should be aware of their interest rates when they first open a product and until they hold the product. A recent Bankrate survey found that 43% of US adults who carry balances on their credit cards do not know all of their interest rates. Take the time to understand the terms and conditions of the product you are considering. Review the interest rate presented to you, possible fees and case, and payment timelines. Knowing these key statistics will help you determine if this particular product is the best fit for you and your budget.
  3. Think long term. If you’re new to the credit market and on the fence about getting a new loan or credit card—it’s important to remember that, if managed responsibly, credit can help you gain access to more wealth building opportunities. “We’re not advocating that people open a credit card and start carrying significant balances on that,” Wise said. “But once you establish that track record, once you establish that longevity [it] will serve you well to help you when you are ready to buy a house [and] to be able to get loans with favorable interest. For example, consumers [who] looking to start small businesses, in many cases, use personal credit and have that ability to borrow is very useful. ”

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