Credit Card Trap: Top 6 Red Flags to Look For
Credit cards can be a good way to track your spending, schedule recurring bills to be paid on time each month, and earn a little bit in cash back along the way.
As long as you are well below your credit limit and don’t use a credit card to spend money you don’t have, credit cards can be a great tool for staying on top of your finances.
However, ultimately, credit card companies are in business to make money. They essentially lend you money to pay for whatever you want when you don’t have the cash in hand, and they charge you a fee for the privilege. Should you miss a payment or if it processes late, extra fees accrue.
While this is normal and an accepted part of the contract, there are some credit card options out there that are set up to take as much of your money as possible as quickly as possible. They generally target people with poor credit who are struggling financially.
Here are six red flags you should look for and avoid when choosing a credit card.
1. Annual Fees
In some cases, credit cards that offer an annual gift to their members may charge a recurring annual fee to help cover the costs. For example, a credit card associated with an airline may provide members with a free domestic flight or two every year, but they might ask for a $250 annual fee in return.
For some people, this is a great value worth investing in, especially if the value of the gift is greater than the fee, the gift is something you will use every single year no matter what, and there are no limiting features to the gift that may undermine its value or otherwise make it unusable.
In most cases, however, an annual fee is just a way to make money off the credit card user in case they don’t pay back what they owe or don’t use the card in such a way that they pay interest.
For people who don’t have a minimal extra cash flow each month, it’s almost never a good use of their limited funds. There are plenty of cards available that offer no annual fees at all. It is far better to use one of these than to opt for one that asks you to pay up front and every year for the privilege of having the card.
2. Very High Interest Rates
All credit cards will allow for a grace period when you charge a purchase to the card, giving you however long is left before the card cycles, plus a full cycle of the card to pay it back before they begin to charge interest.
If you’re working on paying down debt rather than creating it, this is part of what makes credit cards a great financial tool. But if you can’t pay off the statement balance before the card cycles, that’s when the interest rates become a problem.
Almost no credit card has low interest rates. Even the lowest rates available for corporations are usually between 7% and 10%, and occasionally, those who have great credit scores and a long history of financial stability can get these rates too.
Depending on your credit score, you may be able to find credit cards that, on average, have interest rates between 15% and 20%. The higher your credit score, the longer your history of regular payments, and the lower your ratio of debt to income, the more likely it is that you qualify for cards with lower interest rates.
For those working on rebuilding their credit and paying down debt, the only credit cards available often have incredibly high interest rates of 30% or higher. These are not recommended simply because the interest stacks up quickly and can turn a small purchase that goes unpaid into a huge amount of debt.
3. An Assortment of Random Fees
Credit companies looking to make money off those who do not qualify for low interest rate cards will tack fees onto seemingly random things in order to build up your balance more quickly.
They might include a fee just to apply for the card, a processing fee for certain types of purchases or purchases over a certain amount, and monthly fees that recur for no particular reason. Exceptionally high overdraft fees and late fees can be red flags as well.
4. Credit Limits That Sound Too High to Be True
The ratio of credit to income is an important part of how your credit score is calculated, but so too is the amount of open credit available to you (or the amount that you could suddenly decide to go into debt on your credit cards).
If you sign up for a credit card that increases your available credit by 30% or more, it can mean that your credit score will take a triple hit — first, from the hard inquiry into your credit; next, from the decrease in the average length of time of having credit that is shortened by a brand new account; and finally, by the significant increase of available credit.
5. A Lack of Monitoring or Ability to Monitor Your Activity on the Card
Some people try to improve their credit scores by using a credit card, but that will only work if the credit card is reporting your purchases and payments to all three credit reporting agencies each month. Credit cards are not legally required to report to any credit reporting agency, so double check that your credit activity will be reported regularly if your goal for use is to boost your credit score.
Similarly, you will want a way to manage your credit card easily, with a site where you can log in and see all your purchases, including those that are pending, the dates of all your payments, statement balance info, and when your next payment is due along with a button to quickly and easily pay it.
Staying on top of where your money is going is key to managing your finances. The only way to do that is if you can monitor it closely whenever you want. If this option isn’t available, that’s a huge red flag.
6. A Lack of Potential for Changes to the Terms
Though you may initially only qualify for a credit card with a high interest rate or a low amount of available credit, the goal is to make regular payments and to improve your credit, which will in turn open up your options for lower rates on credit cards.
A card with a few red flags that will give you the option to ask for lower rates or an increase in the credit limit after you demonstrate that you are a trustworthy customer may be worth it in the long run. If it helps you to manage your payments now and eliminate the need to close the account and open a new credit card later, which will cause your credit to take a hit, it can be a good call.
Some credit cards have this built into their process. For example, if a customer uses the card regularly and pays on time every month, the company may automatically raise their credit limit.
It’s unlikely that any credit card will lower your interest rates without you calling to ask that they do so, but find out in advance if there is an option for this, especially when the interest rates are through the roof.
Current Has a Card That Helps You Reach Your Financial Goals
Current offers a number of tools to help you make the most of your money, access paychecks as soon as possible, and grow the money you have more quickly.
One of our most popular options is our cash back debit card that provides 15x the points of most other cards on every purchase. These points add up quickly with the purchases you were going to make anyway. They can be turned into cash that you can save or use to accelerate your debt payoff.
Find out more here.
10 Reasons to Use Your Credit Card. (March 2021). Investopedia.
5 Questions to Ask Yourself if You’re on the Fence About Paying an Annual Fee for a Credit Card. (December 2021). CNBC.
What Is the Highest Credit Card Interest Rate? (January 2021) Wallet Hub.
8 Common Credit Card Fees and How to Avoid Them (February 2022) CNBC.
Is It Possible to Have a Credit Limit That’s Too High? (August 2021) Investopedia.
How Often Do Credit Card Companies Report to the Credit Bureaus? Equifax.
Can My Credit Card Company Change the Terms of My Account? (July 2017) Consumer Financial Protection Bureau.
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