If you are new to credit cards, the sheer number of available options can be overwhelming!
It’s exciting to think about all the options a credit card can bring you, you can be a bit more flexible with your purchasing, and if you do it right, you can even earn benefits like cash back and points for travel and gift cards.
However, hidden beneath the catalogue of card payment options are predatory policies which could leave huge holes in your pocket. Some come with unnecessary fees and high-interest rates which make them expensive baggage to carry.
To avoid putting the wrong card in your wallet, here are five warning signs to look out for.
1. Excessive fees
If the costs of holding the card come with excessive fees, then it may be time to dump it.
Some credit cards come with extra costs that are not easily noticeable to consumers.
Make sure to ask about:
- application fees
- activation and processing fees
- monthly maintenance charges
- membership charges
These charges, when totaled, can take a huge chunk out of your income.
Daily Finance’s Advice: Make sure you read the terms and conditions to be aware of any fees that you would be required to pay.
2. The Credit Card Has Exorbitant Interest Rates
Though the interest rates you would pay on cards depends on your credit score, you should always strive to get the best deals.
Interest on credit cards tends to be higher than on mortgages or auto loans. If left to accumulate into large sums, they become harder to pay off.There is no need to pay high interest on something (expenses) that does not impact your finances positively.
According to WalletHub, the average interest rate for a new credit card is 18.04% and for an existing account, 14.61%. (They also have a terrific breakdown of what you can expect to pay, based on your circumstances.)
Some cards charge as much as 25% (Especially store cards)! Higher interest rates can get you further into debt, thereby limiting your chances of attaining financial freedom.
Also, since interest rates on credit cards are not fixed, you may find yourself paying even higher amounts in interest if the Federal Reserve decides to increase benchmark interest rates.
Daily Finance’s Advice: Consider switching to a 0% APR (Annual Percentage Rate) credit card to avoid paying interest rates on your credit card.
3. Does the Credit Card Have a Low Credit Limit?
Credit cards that come with low credit limits can set you back financially in more ways than you can imagine.
Firstly, they come with an annual fee which is deducted from your limit. This increases the interest you would pay on the credit card.
Here’s an example:
You get approved for a credit limit of $500 on a card that comes with a $50 annual fee.
Your initial credit limit comes to $450, meaning you have lost 10% of your credit limit before you even use the card.
Low limit credit cards can affect your credit utilization ratio, which is the second most important ratio used in determining your credit score.
Credit utilization is the percentage of your total credit that you are using. If you have a $2,000 credit limit and a $1,000 balance on the card, your credit utilization is 50%.
When you increase spending on your card, your issuer increases your utilization rate (to get you spending more) which leads to a lower credit score.
On the flip side, a decrease in spending can result in a lower utilization rate and higher credit score.
Daily Finance’s Advice: The rule of thumb is to keep your credit utilization below 30%.
4. Cards That Have Partial Credit Reporting
Card issuers (Whoever you signed up with – your bank, a store, etc.) usually report to the credit bureaus – Equifax, Experian, and TransUnion.
If an issuer skips sending reports to any of the trio, this can affect your credit scores in the future, thereby decreasing your chances of getting a loan.
Cards with partial reporting are precarious because you don’t know which bureau a future lender might decide to get your credit report from.
For example, if a lender wants to get your credit report from Equifax but your issuer reports to Experian and TransUnion. The lender would not be able to see your credit activity which would affect your credit score and interest rate on the loan that you want to obtain from them.
Daily Finance’s Advice: Ideally, you want an issuer that reports to all three bureaus, because they compile the credit reports that form the basis of your credit scores.
5. No upgrades on existing products
Cards that don’t upgrade their credit facility can keep you stuck with a financial product that you have outgrown.
If you are a customer in good standing, make your payments, etc. your issuer should be able to upgrade you or provide improved options to keep your business.
This means you can get an upgrade to a different card type with better terms, lower interest rates, and other perks. The upgrade can be automatic or upon request, though the former indicates that your issuer is customer-centric.
Daily Finance’s Advice: Your credit card issuer should be able to offer you more incentives if your account is in good standing.
Final Word
Credit cards can make our lives a lot easier. They can definitely come in handy, especially in emergencies.
However, they can also set us back financially. Many first-timers get carried away by the lure of buy now, pay later. As such, they do not care not to look out details outlined above.
This invariably puts them into more debt until it may be too late to realize it. Since taking a credit card means that you are taking more debt, it’s best to get the best deal on what you are paying for.
By looking out for the red flags, you can easily sidestep a bad credit card.
Daily Finance’s Bonus Tip: Before you commit to a new credit card, make sure you understand all the terms, conditions and terminology in the contract you’re signing. If you don’t know – ask!
Don’t let embarrassment over not knowing a word or meaning translate into you not getting what you need.
