Credit may make the world go round, but it has become a complicated system where individuals juggle large balances across a number of sources.
If you’re looking to open your first credit card account or just shopping around for a new one, look for these key terms before you sign on the dotted line:
Introductory offers are often associated with store credit cards. You may wonder why stores are willing to give an extra 15 percent discount in exchange for a credit card application. Usually this one-time discount is used to cover up some incredibly high interest rates down the road. Always check the APR before signing up for a store card for a one-time discount.
Just like stores use an introductory offer, many credit companies will use an introductory APR to attract new customers. Offering no APR until the next year makes getting a credit card seem simple and easy. The catch is that in one year when many customers are carrying a balance, the APR will jump from zero to 20.
For a more realistic idea of what kind of interest rate you’ll be paying, check out a section labeled “long-term APR” or “regular APR.” Many of those excited about the low introductory rate are shocked to see rates varying all the way up to 22 percent, even for those with excellent credit.
Many people swap balances to new cards to receive lower interest rates. While this can be an excellent way to consolidate and save, make sure you read the fine print for any balance transfer fees. Some cards will charge a flat rate to transfer a fee while others will charge a percentage of the transfer amount. Be sure the fees don’t outweigh the reduction in APR.
Annual fees are a great way for credit companies to ensure they make money off of you even when you aren’t carrying balances. For those looking to build credit wisely with a card, look for low or no annual fees so you won’t be charged even if your balance is zero. It is also important to double check for new fees because if you pay off a card and stop reading the statements while actually incurring a fee every year, you can ruin your credit without even knowing it.
Many credit companies will advertise their lowest rates but not explicitly say that these rates are only available to those with excellent credit scores. If you haven’t built credit or have low credit, be sure you know what the APR will be based on your credit score. The advertised APR may be based on a higher score.
Many consumers are talked into starting a credit card because they think they will be offered great rewards. Signing up for a rewards credit card is typically a bad idea if you are new to credit. Rewards cards typically require higher credit ratings, have higher APRs and many times the rewards come with more stipulations and catches than they’re worth.
Remember that credit cards are used to bridge gaps in your budget and build a credit record of dependability and responsibility, not to get two percent cash back and airline miles you can’t use.
Photo thanks to The Consumerist under a creative commons license from Flickr.