Credit cards offer flexibility, convenience, and the ability to enjoy certain rewards. As a novice looking to get your first credit card, you’ll have endless options, and the process can be overwhelming.
Learning that credit cards also come with risks you must be aware of further complicates the process. Understanding the risks and spotting certain red flags can help you settle on the best credit card provider.
Here are five credit card red flags you need to be aware of.
Exorbitant and Hidden Fees
Avoid a credit card with high annual fees, especially if its benefits don’t justify the exorbitant fee. Some credit cards also have setup fees, processing fees, maintenance fees, foreign transaction fees, and other hidden fees.
Be cautious of these unnecessary fees when choosing a credit card. Determine if the benefits listed are worth the annual fee they are charging. For example, if you travel often, it makes sense to have a premium travel rewards card that gives you access to free checked bags, hotel credit, lounge access, etc.
However, opting for the same card when you only need one to pay for your daily groceries and gas won’t be beneficial.
High-Interest Rates
Apart from exorbitant fees, you must also be careful about the interest rate a credit card company charges. Some companies have credit cards for those with poor credit or no credit history.
Nonetheless, while these cards might help you build your credit history, you’ll have to part with high interest rates. Choosing a card with high interest means committing to paying your balance in full monthly. You may also have to limit your purchases or devise a budget to cover the interest and the card’s balance.
Extremely Low or Too High Limits
Stay away from credit cards with extremely low or too high limits when getting your first card. Some companies will offer you up to a $10,000 credit limit as a new cardholder, but this is a red flag. Getting back to this limit may be challenging if you fail to pay off your balance.
Conversely, if you’re trying to build your creditworthiness, an extremely low limit can affect your credit score as it increases your credit utilization rate. Using up most of your available credit may indicate to lenders that you’re in financial distress and negatively impact your credit score.
Credit Cards With No Way to Upgrade
A good credit card should allow you to upgrade to a regular unsecured card if you first applied for a secured card to build your credit. Secured cards have a refundable deposit that acts as your credit limit and collateral if you fail to make payments.
Repaying the balance over time shows you’re responsible and could qualify for an upgrade. Unsecured cards offer a higher credit limit, give you more rewards, and don’t need collateral.
Cards Without a Rewards Program
Avoid credit cards without a rewards program. Credit cards with rewards that expire quickly are also red flags. Find a credit card provider who provides rewards and gives you enough time to use them.
These are some of the red flags to watch out for when looking for a reliable credit card provider. Being aware of these potential risks and pitfalls can help you make an informed decision when choosing and managing your credit card. Remember to compare the different options available, read the terms carefully, and ask for advice if you are unsure.
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