Everything You Should Know About Getting a Credit Card but Didn’t Have a Clue to Ask
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It's easy to get intimidated by the mountain of fine print that comes with your credit card. So you ignore it and use your card to make purchases, get your bill, and pay the amount due. How hard can it be?
If you pay your balances in full each month, it's not difficult to understand at all. You just got yourself a free loan every month, and if you're smart, you used a credit card with travel rewards that you can redeem for free airfare, or just simply cash back. However, if you keep a balance, you'll quickly find that all that fine print actually details all the ways you incur fees and other costs for your purchases.
If you're wondering why it seems like your credit card debt isn't going down even though you're making payments, these are all the reasons why.
1. Interests adds up quickly
Did you pay attention to the APR when you applied for the credit card? Did it offer a 0% APR for a limited time, or a range of APRs? The APR determines your monthly interest on the balance you haven't paid off. APRs can be as high as 30%. Racking up a credit card bill could mean thousands of dollars in interest alone. Even worse is that the second you leave an unpaid balance on your card, your grace period disappears. Leave even a dollar on your balance after a bill is due, and all purchases from then on get charged interest the day it's posted. Are you sure those shoes are worth it?
2. Cash advances are charged differently
Seems like a sweet deal -- put your credit card in an ATM and pull out some cash. But each cash advance transaction is charged a fee, usually 3% of the transaction. On top of that, cash advances sometimes have a different APR than purchases, and they are notoriously high. Finally, is you have balance on your card from purchases, usually your payments will go to pay down the balance with the lower APR, keeping your cash advance balance the same and continually accruing interest at the much higher APR rate. Don't do it!
3. Don't forget the annual fees
Did you check whether the card you signed up for has an annual fee? Yes, some credit cards charge an annual fee, and you may not notice because they might waive the fee for the first year. Or maybe you signed up for the card knowing that there's an annual fee but you figured you'd cancel next year before you were actually charged. Well we're creatures of habit, and like most subscriptions, we never bother to cancel even when we no longer use them. Before you get a credit card with an annual fee, make sure you are actually using the benefits that annual fee is paying for. Otherwise, just don't sign up!
4. Late payments are costly
Making a late payment could mean a hefty fee, usually around $30 or more. If you're the type to pay your balance in full every month, you might be surprised when you make your first late payment the barage of extra fees -- the late payment fee, the interest charge for having a balance past the grace period, and a rise in your APR (called the penalty APR). Some companies will automatically lower the APR back to its previous rate after you make a series of on time payments again, and some issuers claim they'll never raise your APR for late payments, but for the most part, credit cards can raise your APR after just one late payment.
If you have any doubts that credit card debt is best to be avoided, hopefully this information will convince you. Check out our credit card guide for more tips on using credit wisely.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any bank, card issuer, airline or hotel chain.