Credit cards are an easy way to pay for items and services, but if you’re not careful, they can also trap you in debt for years. Some, but not all, credit cards have one or more of the potentially harmful features discussed in this article, and certain cards have worse terms than others. Read on to learn how to recognize traps when choosing and using a credit card.
Credit cards typically charge variable rates so the cost of not paying off your balance each month might change drastically, like from 13% to 25%, depending on the index. Even cards that have a “fixed” annual percentage rates (APR) might be fixed for a limited period of time, and then switch to a variable rate.
Also, credit cards often have different APRs for balance transfers, purchases, and cash advances. Some cards offer introductory APRs, as well. The low, introductory APR usually applies for six months and then goes up significantly. If you still have a balance outstanding when the low rate ends, the high rate will apply to the balance as well as new transactions. And, you could lose the low rate if you fail to meet the terms of the contract, like if your payment is late.
Generally, you want to choose the lowest and most stable APR that will apply to the way you plan to use the credit card. For example, if you plan to carry a balance, look at that APR. Even a small difference in the APR can make a big difference in how much you’ll pay.
Credit card companies can charge you over-limit fees if you “opt in,” which means that you agree in advance that the credit card company can allow transactions putting your balance over the credit limit. But if you don’t opt in, the company can’t charge you this kind of fee even if the company processes a transaction over your limit. So, the best strategy to avoid over-limit fees is not to opt in.
If you happen to opt in by mistake, you can revoke the agreement at any time. Though, fees would still apply to over-limit transactions already processed.
Credit card companies routinely charge penalty fees for late payments and payments returned for insufficient funds. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 limits these fees to the actual amount the violation cost the company, or to a maximum of $27 for the first violation and $38 for a second violation (2017 figures) if it occurred within six billing cycles of the first violation. If you occasionally pay late or sometimes have insufficient funds, compare how much different companies charge for these fees.
In addition, if you go over the limit, your payment is returned, or you have one or more late payments, your interest rate might go up. The default rate then applies to any new balance, not just to the late payment. After a credit card company raises your APR, it has to reevaluate it every six months, but you could still end up paying the default rate for quite a while. And if you’re more than 60 days late with a payment, the default rate can apply to the outstanding balance as well (though you usually can get it reduced on the outstanding balance by making the next six payments on time).
Getting a cash advance or using the convenience checks that a card issuer sends you can be quite costly. Credit cards tend to charge a fee of up to 5% (or a minimum amount like $5 or $10) for taking a cash advance, though some waive the fee on convenience checks. Also, the APR is normally high—around 25%—for cash advances.
Some credit cards charge annual fees, while others don’t. Generally, you should look for one that doesn’t require an annual fee. But if you plan on carrying a balance, a card with an annual fee but a low interest rate may be less expensive than a card with no annual fee but a high interest rate. Also, beware of other fees. New fees seem to pop up all the time.
A grace period lets you avoid all finance charges if you pay your balance in full by the due date. If you don’t get a grace period, the card issuer can impose a finance charge from the date you use your card or from the date each transaction is posted to your account—even if you pay your bill in full each month. Avoid cards that don’t offer a grace period.
Different cards might appear to offer the same APR, but the balance computation method might be different, which could cost you very different amounts. Credit card disclosures have to tell you which method the company uses to determine your monthly charge (the finance charge). The method that results in the lowest balance each month will be the cheapest card for you.
Don’t get lured in by cards that offer bonuses, let you design the card, or give you discounts. If you will pay high interest or could get hit with high fees of various sorts, or if the card uses one of the worst computation methods, you’d be better off without the perks.
Credit card companies must display their credit agreements online. When you go to a credit card company’s website, look for a link that says “Terms and Conditions” or “Pricing and Terms” (you may have to hunt around). Use this information to compare terms between cards.
When you get a credit card application or pre-approved solicitation, the company has to disclose certain terms of the agreement. They could be tucked away on the back of one of the documents, so you might have to do some searching to find them.