Yahoo Finance 5 Warning Signs of a Bad Credit Card
It doesn't take much effort to find dozens or even hundreds of credit card offers. All you have to do is visit the websites of the largest credit card issuers, such as JP Morgan Chase, Citibank and Bank of America. Add to that the Visas and MasterCards available from major retailers, hotel chains and airlines, and it's easy to find yourself awash in offers.
Naturally, some offers are better than others. It's often tricky to determine what the best offer is, but there are a few warning signs of an offer that's not as good as others. Here are five clear signs of a credit card you should skip right past.
No bonus rewards. Reward programs are common features of credit cards. They offer you some form of reward or rebate for purchases made on the cards.
Reward credit cards come in a variety of shapes and sizes. Some provide discounts at specific retailers. For example, the Target Visa gives you 5 percent off on all purchases at Target. Various gas station chains offer as much as 25 cents per gallon in rebates when you use their particular Visa or MasterCard to buy gas. Other cards offer points that can be used in various ways. Some hotel chains, for instance, offer cards that generate points with each purchase and can be exchanged for a free night of lodging at one of the hotels in that chain.
If you're smart, a good rewards program can easily help you save on everyday purchases. There are multitudes of cards out there that offer at least some kind of rewards program, so there's no reason to accept a card that offers you nothing in return for using it.
High APR. If you carry a balance on your card from month to month, you're going to face interest charges. The higher the APR on your card, the more interest you're going to pay each month on a particular balance.
Let's say you have a 19.9 percent APR on a card with a $1,000 balance, and your monthly minimum payment is 4 percent of your balance. In that case, to pay off the card, you'll pay $40 a month, but it will take 73 months. You'll also end up paying a total of $1,556, which translates to an extra $556 in interest.
If you simply reduce the interest rate to 9.9 percent APR (and leave the other factors the same -- a $1,000 balance and a 4 percent monthly payment), things change quickly. You'll still pay $40 a month, but you'll end up paying off the card in 58 months. Your total payment will be $1,209.11 -- only $209.11 paid in interest.
Therefore, if you carry a balance, a high APR is something to avoid because a lower APR will directly save you money. (Of course, it's better to simply not carry a balance.)
Low credit limit. Each credit card offer comes with a credit limit that indicates the maximum amount of credit you can use on that card. While it's rarely a good idea to use a card up to the credit limit, there are times when that flexibility can help.
For example, if you're going to make a major purchase like a laptop, it's nice to have the consumer protection that a Visa or MasterCard offers, but if your credit limit is too low, you can't simply buy it with a swipe of the card.
A higher limit can also help improve your credit score, since scores factor in credit card utilization rates (the ratio of your balances to credit limits).
The bottom line: If your card offer limits your credit to $250 or $500, look elsewhere.
High fees and penalties. Credit card companies make a lot of money from fees. Fees for balance transfers, cash advances, cash withdrawals from ATMs, payment by phone, online payments -- if there's a way to charge you, they will.
That's why it pays to look at the fine print. If you find that a card will charge you fees for all of these things -- particularly for things you are likely to do, like transferring balances -- skip it and move on to the next offer.
Variable interest rates. This is a particularly pernicious trick that some credit card companies like to use. They'll advertise a very low initial rate, but it turns out that it's a variable rate they can change at will. Trust me, they will change it, and it will cost you.
You should look for fixed-interest rate cards, even if they're a bit higher than variable rate cards. Still, be careful -- there are situations when companies can change the rate on a fixed rate card. Be aware of those situations by reading the documentation that comes with your card.
If you avoid these five warning signs of a bad credit card, you'll wind up with a card that's right for you.
Trent Hamm is the founder of the personal finance website TheSimpleDollar.com, which provides consumers with resources and tools to make informed financial decisions.
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