Shortly after the recent financial crisis, credit-card issuers tightened their requirements, and consumers decided that they didn’t want to deal with credit-card debt. Now, though, confidence is returning. According to J.D. Power and Associates, the average cardholder had a higher balance in June 2012 than in June 2011.
1. Promise of a Low APR
In order to get you to apply for a card, issuers use large, bold font proclaiming the lowest possible rate offered by the account terms. This can be something as attractive as 9.99 percent, but you need to watch out, as not everyone qualifies for this rate. Indeed, the lowest rate is only for those with the best credit scores.
Instead, look on the back of your credit-card application. There should be a list of major fees and interest policies. You might see that the interest rate is as high as 20.99 percent. That means that, instead of getting the low rate marketed to you, you could actually end up with a higher interest rate.
And, don’t forget that the low APR isn’t a fixed rate. Look for the language that indicates that the rate is variable, changing with “market conditions.” Your rate could easily go up later. Of course, the best way to avoid this trap altogether is to pay off your balance each month. Then, it won’t matter what the interest rate is.
2. Generous Rewards Program
Credit-card issuers like to market their generous rewards programs to potential account holders. They might offer “up to 5 percent cash back” or offer what seems like an insane amount of bonus airline miles when you sign up.
On cash back cards, you need to make sure that you understand the program. In some cases, you only receive 5 percent cash back on rotating categories. Other credit-card rewards programs require you to meet a certain threshold. One card even requires you to spend $3,000 each year in order to get access to the 1 percent cash back on all purchases. And don’t forget to check for caps on the rewards you can earn.
Be wary, too, of promises of 40,000 or 50,000 airline miles when you sign up for a credit card. While it sounds like a lot, remember that these miles (and “points”) don’t directly translate into large cash rewards. Also, it can take all those bonus miles just to “pay” for a single round-trip ticket—and you may have to worry about blackout dates.
Before you sign up for a credit card just for the rewards, assess the situation and the true value of the rewards. Often, your best bet is a straightforward cash back program that allows you to earn unlimited cash back rewards. Take advantage of the card by making everyday purchases, and then paying off the card in full each month.
3. 0 Percent APR Balance Transfer
A balance transfer can be a great way to pay off debt at a faster rate. However, you need to be careful. First of all, you might not be approved for the amount you want in order to consolidate your credit-card debt. Second, what the credit-card issuer’s marketing materials don’t highlight is the balance transfer fee.
Somewhere on the application (probably on the back, or in small print next to an asterisk) the credit-card issuer will reveal its balance transfer fee. This fee is likely to be 3 or 5 percent of the balance you transfer. So, if you transfer $5,000, you will pay a fee of $150 (3 percent) or even $250 (5 percent). Of course, if your current credit card has a high enough interest rate, you can still come out ahead to pay the balance transfer fee. But you should be aware of the cost so you can analyze whether it’s worth it.
Also, you need a plan to pay off the balance before the higher interest rate kicks in. Check the length of the introductory period. Your balance transfer might only be 0 percent for six months. Look for a longer period if you have a higher balance you want to transfer. Remember that at the end of the period, your interest rate will go up. If you haven’t paid off your balance (and the credit-card issuer hopes you won’t), you will pay for it. And don’t miss any payments, or pay late: Your 0 percent rate becomes void if you make those mistakes.
Make a plan before you apply for a 0 percent APR balance transfer. Try to arrange matters so that you will pay off the balance before the end of the introductory period.
A new credit card can be a great way to take advantage of new opportunities. However, don’t let the marketing gimmicks close your eyes to the fact that the credit-card issuer hopes you won’t be savvy with your spending choices.
Miranda Marquit is a financial blogger and freelance writer. She writes for a number of sites, including Best Rates In.