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By Ivan Serrano
Published November 2, 2023
People often open credit card accounts because of the perks and incentives they offer. New cardholders may enjoy a one-time signing bonus, cash back for purchases, and generous bonuses of rewards points, sometimes in the form of frequent-flyer miles.
But before signing up for a new credit card, you should understand the terms and conditions involved in the account (what’s often called the fine print). This short guide outlines the red flags to look out for when choosing a credit card company.
If you’re new to credit or looking to improve your score, it’s crucial to have a clear understanding of the credit card agreement or terms and conditions. Review your cardholder agreement during your application, and keep an eye out for the red flags below.
Make sure that any annual fee on a card is within your budget. Paying a yearly fee on a credit card is not ideal, but it can be a reasonable expense. Moreover, a card with an annual fee may be your only option if you are unbanked or have a think credit track record. And if you get credit card rewards and other incentives then annual fees may be worth paying on their own.
Annual fees are not the only costs you must pay after opening a credit card account. Many cards have other hidden fees that could be a burden on unknowing consumers. Though laws like the CARD Act prevent some of the fees that were once used to confuse consumers like raising rates on existing balances.
For example, some cardholders have to pay application fees, activation payments, and processing fees, in addition to late fees when you miss a payment. Some cards they even require membership and monthly maintenance charges. These fees can be avoidable, unnecessary, and expensive. Though, unfortunately, they are standard on certain unsecured credit cards for poor credit.
If you do not have a credit card balance and pay your bills on time every month, you will not be affected by your credit card’s interest rate. However, if you used your credit card but failed to pay on time (which happens at times to even the best intentioned people!) you’ll end up having to pay your credit card bills with interest.
Your interest rate will depend on your creditworthiness or the metric that indicates to the issuer the amount of risk it is taking by lending you money.
Generally, bad credit scores mean a high annual percentage rate (APR) — which is the percentage you’d owe in interest if you carry the same balance every month for a year. According to Forbes, in October of 2023 the average credit card APR came in at 28%.
Before applying for credit, shop around for credit cards that offer reasonable interest rates. Also keep in mind that if you have other borrowing options, running a balance on your credit card may not be your best choice.
Many people know that getting a new credit card and paying the balance on time monthly can help you build credit.
However, you can only build credit if your credit card payments are sent to the major credit-reporting bureaus in the country: Experian, TransUnion, and Equifax. Most issuers report to the credit bureaus, but if you use an authorized user or secured credit card, there’s a chance your payments won’t be reported to the credit bureaus.
To ensure your payments are reported to the bureaus, you can use a credit monitoring app that provides a real-time view of your credit reports. (Remember the US government also provides a free option to see your credit reports from all three major bureaus once a year).
A recent survey shows that 14 percent of American cardholders are not confident about their ability to pay next month’s credit card bill. The number highlights the importance of having a financial strategy when taking out a credit card. Read on to learn simple money-saving tips for cardholders.
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Credit card issuers publicly disclose their interest rates and fees, including annual and foreign transaction fees. You should take advantage of all the information online before you decide what type of credit card to choose. Look up card issuers online and learn the ins and outs of the plans that interest you. Make sure you make it past the flashy credit card marketing language by turning resources like credit card comparison sites, the Consumer Financial Protection Bureau’s suggestions and standardized disclosure boxes, and even digging into the fine print yourself.
Several credit card companies offer cards with no annual fee, which can be a wise choice for first-time cardholders.
Remember that once you apply for a credit card and a lender reviews your credit, the process adds a hard inquiry record to your credit report. The inquiries drop your credit score by a few points, so reserve hard inquiries for the accounts you want to open.
If you are still in school or want to return, you can try college student credit cards to build credit. The cards are designed for students and typically offer low credit limits, which can benefit people who are only getting started.
Some issuers also give students reward programs, such as cash-back rewards and an introductory APR or introductory rate period.
It is normal to feel intimidated by your credit card’s APRs. However, as long as you pay your balance on time and in full, you do not have to pay them.
Most credit cards today offer a grace period, which refers to the time between the billing cycle’s end and the payment due date. During this period, your issuer will not charge any interest on your outstanding balance if you pay off your bill before the due date. The length of grace periods varies depending on the card issuer.
Using autopay features on electronic wallets can be an easy way to ensure you always pay credit card bills on time. You can also find some credit cards that do not have to pay late payment fees.
If you are confident you can pay your credit card bill on time, use your card as a budgeting tool. Every time you buy something, use your credit card so you can see precisely how much you spent at the end of the month.
Remember that, for this approach to work as intended, you must pay off the bill at the end of each month. To ensure your spending does not get out of hand, you should not spend more than what you have in your bank account.
Knowing the red flags in your credit card’s terms and conditions can help you save money in the long run. Reading the fine print ensures minimum payment and protects you from expensive finance charges.
If you think you’ve been misled and improperly charged a fee, you can file a report with the Consumer Financial Protection Bureau, which handles complaints against malicious lenders, banks, and financial institutions and you may have other options to report unfair credit practices.
Ivan Serrano has been been a technology and business writer since 2015. He is obsessed with our constantly evolving fast-paced society and finding ways to teach readers something new. He has worked with companies like SmallBizClub, StartupNation, Namecheap, Time Doctor, and Searcheye—which has a business relationship with FairShake.
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