It is a common perception that you need credit cards to build credit, but that is not necessarily the case. And while credit cards can be useful to a consumer’s overall financial picture, they can be dangerous than helpful when used irresponsibly. Here are five credit card dangers to watch for:
The 0% introductory APR. Most 0% APR offers are for balance transfers only, meaning new purchases or cash advances will be subject to a much higher interest rate. Even if the offer does include new purchases, the 0% rate generally expires very quickly, usually after a few months. Most of these offers are fraught with exceptions. For example, you sometimes won’t know whether you are eligible to receive the 0% interest rate until after you apply. If you have one late payment, the APR will jump to a very high rate, set at the discretion of the card issuer.
Late fees. Making a late payment on your credit card typically comes with a double whammy. Not only do most cards sharply increase your APR (some double your APR), they also charge late fees, some as high as $40. If you make a late payment more than once, many credit card companies reset your APR to the default APR or ceiling APR, which is usually very high.
Fixed APR. The term “fixed APR” is often times misleading. When you see the term “fixed APR” for a credit card, it means the credit card issuer is legally obliged to notify you if they change the APR (unless you have made a late payment). Credit card issuers can change the interest rate on your card at any time and for any reason. When they do change the APR, federal law says they must give you 15 days notice.
Low minimum monthly payments. At first glance, when credit card issuers set the minimum monthly credit card payment very low it seems like a nice gesture to you as a consumer. However, it is not. Avoid making just the minimum required monthly payment because it will increase the total cost of what you charged on your credit card through higher interest charges. It also lengthens the time needed to pay off your balance, which also increases the amount of interest you will pay. Make every effort to pay off your credit card balance every month.
Sign up bonuses. Many credit card issuers offer sign-up bonuses on new cards, such as 25,000 airline miles for just opening an account. However, there is often a catch. In many cases, you will need to charge a certain amount on your card within a specified period. While the details vary, completing these offers may be difficult, given your budget. Other cards may boast “up to 5 percent back” on your purchases, but that may be only at certain retailers and not for every purchase you make. Make sure you are informed about all the fine print with the card, and don’t spontaneously sign up for a card just to get airline miles. Make sure you take time to think about how many cards you already have, and whether you truly need another card. If you don’t need another card, it might be a good idea to pass on it.Call today for more information.
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