Credit cards can be amazing financial tools when used correctly. But half the battle is choosing the proper card from the start. Some credit cards that come with hidden fees or high interest might end up costing you a lot more unnecessarily. Here are 7 credit card pitfalls to avoid if you want to successfully leverage credit cards as part of your larger financial strategy.
Not Being Smart About Fees
Certain fees are okay as long as they’re within reason. But be cautious of fees that could be categorized as unnecessary or excessive. Check cards for:
- Annual fees: A card with an annual fee isn’t ideal. These cards typically offer perks that more than make up for it. A travel card with an annual fee might give you access to VIP airport lounges or a nice chunk of air miles. So you’ll want to balance the price of the annual fee with the value you can expect to get from the card.
- Application fees: Any card that charges a fee just to apply should throw up a red flag in your brain. If you’re really intrigued by the card, contact customer service and see if there’s a way to waive the application fee.
- Balance transfer fees: If you’re opening a new card for debt consolidation, don’t be fooled by a 0% APR offer for the first few months. There’s often an additional one-time fee of around 3-5% of the transfer balance, too. Before you commit to the new card, be sure to understand how much the transfer fees are and if there’s a way to have them waived.
Ignoring High or Changing Interest Rates
At an average interest rate of 16% in May 2021, credit card rates tend to be fairly high compared to secured debts and other types of unsecured loans. Of course, interest rates change based on the borrower. So those with lower credit scores will be viewed as riskier to lenders and therefore end up paying higher interest.
When thinking about interest rates, you’ll want to know how rates may change following an introductory offer. Companies can lure you in with the promise of 0% APR for the first 12 months. But after those 12 months are up, and you’re carrying a balance, they’ll hit you with high-interest charges.
And rates that are too high can end up getting you in a vicious cycle of debt. You may be struggling to make interest-only payments while barely touching the principal balance at all. Before you sign on to any new credit card, be sure the interest rate is one that you can reasonably manage for the balance you plan to carry or, better yet, plan to pay down the balance each month to avoid interest charges entirely.
Not Taking Advantage of a Bonus
The allure of some credit cards is how much you can get as a sign-up bonus. Some cards will give airline miles or cash if you spend a set amount in the first few months. But it’s critical to understand what precisely that means, so you don’t spend a bunch of money only to find out you didn’t actually qualify.
If you’re unsure whether spending $500 in the first three months means each month or throughout all three, check with the creditor to confirm. Better to know in advance exactly how to earn the bonus than to miss out on the opportunity based on something trivial.
Choosing the “Cool” Card
Some cards appeal to specific groups by displaying a favorite sports team logo or a picture of pretty animals. But it’s what’s underneath the plastic that matters. Borrowers who want to carry around the prettiest card might find themselves in a situation where the fees or rewards don’t actually align with their financial goals.
Accepting Low Credit Limits
Cards with credit limits that are too low hurt you in a few ways. First, they can inflate your credit utilization ratio. For example, if you get a new credit card with a $1500 limit and spend $750 the first month, you’re using 50% of your available credit.
A ratio of around 30% is more preferable when it comes to your credit report and score. And a way to quickly lower credit utilization is by upping your credit limit. If you had received even a slightly higher credit limit of $2500, the utilization ratio drops from 50% to 30%, and that minor change has a significant impact on your credit score.
Low credit limits can also mean you won’t have a lot of opportunities to rack up rewards. Before you commit to a card, make sure you can get a credit limit that’s reasonable for the type of spending you want to do.
Choosing the Wrong Rewards
You can find a rewards card for pretty much anything these days. Cards let you earn points on sporting events, travel, online shopping, groceries, you name it. And if you’re going to choose a credit card specifically for the rewards aspect, make sure you understand how you earn rewards and how to spend them.
Some rewards have expiration dates that could catch you off guard if you’re not careful. Read the fine print and be honest with yourself about whether you’ll actually be able to use all the travel miles you’ve earned before they expire. If you won’t, it might be best to lean on a card that will just give you cashback on purchases instead.
Applying for Every Card
If you’re not selective about what you want from a card, you might think about just shopping around by applying for several cards. Since each application triggers a “hard” credit inquiry that’s reported to credit bureaus, you could be dinging your score by a few points each time.
In addition to potentially damaging your credit score, credit card companies might also find it suspicious that you’re applying for a lot of credit at once. That can be a red flag to creditors that may think you’re in desperate need of access to cash and thereby riskier.
Take time to research the cards that will have the most benefit for your financial strategy and then only apply for one, or maybe two, once you’re sure.
The Bottom Line
Choosing the right credit card is an essential element of your financial strategy. And if you can avoid the most common credit card pitfalls, you’ll have a better chance of using credit cards to build good credit, responsibly use debt, and reap the rewards of doing so.