It's a tough economic climate out there, and credit card companies are aggressively promoting new cards and loan programs to vulnerable consumers. When you're short on cash, a credit card can seem like the perfect way to coast through the tough times. But using a credit card unwisely or accepting an offer with outrageous or unclear terms can wreak havoc with your finances for years to come. Is a new credit card right for you and your finances? Consider these guidelines before filling out that application.
1. Do you need it?
Think about what you hope to gain from this credit card. Is it a lower APR or balance transfer rate? Are you hoping to cash in on a bonus program offer, such as lots of airline miles or hotel points? Or are you just looking for a way to buy things you can't really afford? Unless you feel you're going to improve your overall financial situation, which means having a high credit rating and minimal debt, opening a new credit card account doesn't make sense. It may pay off in the short term with a free tote or other gift, but it won't help you gain financial stability.
2. What type of interest rate is offered?
The average interest rate charged on credit cards is about 15 percent. If the card to which you're thinking of applying offers a lower interest rate than one on which you're carrying a balance, it might make sense to open the account. However, if based on your credit rating and history, the interest rate isn't anything special, the company doesn't deserve your business. Instead, consider negotiating a lower interest rate with your current credit card company.
3. What types of balance transfer options are offered?
Sometimes, credit card companies will offer very low balance transfer rates to consumers with good credit. If you are carrying a balance on a credit card with a high interest rate, it makes sense to switch to a card with a lower rate and continue to make regular payments. Once the promotional term is up, though, you'll be paying a new, higher interest rate, so make sure you pay off the balance before the promotional term runs out. Note: Most balance transfer offers come with a fee, so be sure to find out what it is before applying.
4. What type of reward program is offered?
Reward programs have seen a lot of popularity recently, with credit card companies offering everything from cash back to points you can use to "buy" products. If a credit card's reward program is what's attracting you, take into account the cost of opening a new account with the value of the reward program. How long will it take you to earn a reward? Do you have to spend a minimum monthly amount or carry a balance in order to receive it?
5. What types of fees are associated with the credit card?
With credit card offers come pages filled with fine print. Be sure to review the legal verbiage and see if any fees apply to the account. Some credit cards, such as airline mileage cards, almost always charge an annual fee. Will you be earning enough miles to offset the cost of the annual fee? And be on the lookout for other possible charges or penalties, such as loss of a low interest rate in the event of a late payment.
The key thing to keep in mind is that there will always be a tempting credit card offer waiting for you. If you've thought about it and feel you're ready to open a new account, make sure you've done the research on all possible offers. Along with financial help websites, the Federal Reserve Board's Survey of Credit Card Plans is a helpful tool in reviewing credit card offers. Compiled twice a year, the survey lists credit card plans offered to consumers and notes each card's features.
Credit cards can be useful, but they have a huge impact on your credit rating and your financial stability, so don't jump into anything without thinking about how it will affect you in the long run. Knowing all you can about a credit card program can help you find an interest rate, balance transfer option, and reward program that best matches your needs.
For more information:
Credit Abuse Resistance Education (CARE) Program
Federal Reserve Board: Choosing a Credit Card
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