- Shutterstock/Adam Supawadee
Ahead of opening a new credit card, especially if you receive a direct offer in the mail, always double-check these four things:
1. Interest rates
The annual cost of borrowing money charged by the credit card company is called the annual percentage rate (APR). Lenders use the APR to calculate the fee you owe based on the balance you carry, if any.
You only have to worry about paying interest on the money you borrowed if you carry it over to the next month. If you pay off your balance in full every month, the APR will not apply. But if you’re only paying the minimum amount, you’ll be charged a percentage of your outstanding debt, plus what you owe. This could tack on hundreds, if not thousands, of dollars to your payments over time.
The APR set by the lender is determined in part by your credit score. Issuers will charge you more if you have a lower credit score because it shows you’re not as reliable at making on-time payments. Credit cards typically have different APRs for purchases, balance transfers, and cash advances. It’s worth noting that rewards credit cards generally have higher APRs to offset the included suite of benefits.
Although an APR can be fixed, meaning you’ll maintain the same rate you opened the card with, the lender can still change it as long as you are given proper notice. It is more common, however, to have a variable APR, which is a rate based on the prime rate that can shift without notice. That means, when interest rates go up, so will your APR, making your borrowing costs more expensive.
Be wary of companies that use the double-cycle billing method to determine your interest. This method, which combines the average daily balance of the current billing cycle and the average daily balance of the previous period, can greatly increase your interest payment.
2. Minimum payment
It’s best practice to pay off your credit card bill in full every month. Consistently paying the minimum could cost you a fortune in the long run, damage your credit score, and affect your ability to qualify for other loans, like a mortgage.
Formulas for calculating the minimum payment vary among credit card issuers, but it’s typically a flat percentage (1% to 3%) of your total balance. But, if you carry a balance, your minimum payment will likely be a flat percentage plus interest and any applicable late fees.
Luxury travel rewards cards, in particular, are known for charging cardholders sky-high annual fees – the American Express platinum card recently rose to $550 a year – in exchange for benefits like airline credits, rewards points, hotel upgrades, and much more.
Some cards will waive the annual fee for the first year, like the Chase Sapphire Preferred. Still, find out when the fee will hit your account, so you can budget for the extra charge. Before opening the card, calculate the dollar value of the benefits and rewards you plan to use, and make sure the annual fee is less than or comparable.
Other infractions you may be charged fees for include late payments (the fee for this is likely to be around $35), going over your credit limit, balance transfers, and foreign transactions.
4. Credit limit
This is the amount the issuer allows you to borrow, which depends largely on your credit history. Generally, the higher your credit score, the higher the limit.
Still, even if you’re being offered a high limit, avoid reaching it or you’ll derail your credit utilization ratio – that is, the amount of credit you use versus how much you have available to you.
Available credit counts all the cards you have: If you have one card with an $8,000 limit and one with a $6,000 limit, your total available credit is $14,000, even if you only spend $1,000 a month on one of the cards. The closer you get to your limit, the harder the hit on your credit score.
To make sure your credit score doesn’t take a hit, keep your credit utilization to 30% or less of your total available credit, even if you pay your balance in full each month.