Used well, a credit card can offer real benefits. Miss the major warning signs, though, and it can end up costing you a lot of money.
If you’re shopping for a new card, the sheer number of options can feel overwhelming. There seem to be endless versions to pick from, and finding the right one isn’t simple. To land on a card that suits your goals and the way you spend, you need to rule out the ones that come with sky-high rates and pointless fees.
To help narrow things down, here are 5 warning signs to look out for when you choose a credit card.
1. Interest Rates That Are Far Too High
If you pay your balance in full every month, your card’s interest rate doesn’t matter, because you’ll never pay interest. But money trouble and other circumstances can leave you carrying a balance, which is convenient and expensive at the same time.
Federal Reserve figures put the average annual percentage rate on credit cards that charged interest at 16.30 percent in May 2021. The rate you get depends on your creditworthiness, which signals to the issuer how much risk it takes on by lending to you.
As a rule, a lower credit score means a higher APR. Some cards aimed at people with bad credit go much further, with APRs of 30% or more.
Cards with low or promotional rates usually require good credit (FICO scores of 690 or higher), but people with weaker credit still have some options:
Secured credit cards ask for a refundable security deposit that acts as your credit limit and as collateral. Since the bank is taking on less risk, these cards can be easier to get. Some secured cards also carry lower ongoing APRs, particularly the ones with annual fees.
Depending on your score, a credit union card may be within reach, and it could offer lower interest rates than the big banks. You will need to become a member of the credit union first, and membership may be limited.
2. No Way to Move Up to Better Terms
Using a secured or starter card responsibly will help your credit improve. Once it does, you may want a card with better terms, bigger rewards or richer perks. It helps a lot if your current card makes that switch easy, but that isn’t always how it works.
The better cards for bad credit (mostly secured cards) tend to offer an upgrade path, either automatically after a stretch of responsible use or when you ask. That means you may be able to "upgrade" to a stronger card from the same issuer without closing your existing account. If your account is in good standing when you upgrade, you’ll also get your deposit back.
A card without an upgrade route can still be useful. Over time, though, you’ll be left with a product you’ve outgrown, and that gets expensive if you’re paying an annual fee for it. You could close the card altogether, but doing so will hurt your credit scores.
3. Too Many Fees
Lots of credit cards charge an annual fee, which is what you pay the issuer each year to keep the card open. These fees usually come with rewards cards that offer things like travel perks, yearly purchase credits and purchase protection. Those benefits can easily be worth as much as the fee, or more.
If you’re building or rebuilding credit, a card with no annual fee is usually the smarter pick. If you do go for a card with an annual fee, make sure that’s the only fee it charges.
Avoid cards that pile on other charges. They add up fast and can eat into your credit limit when they’re billed automatically. Application or activation fees, membership fees and maintenance fees are a few examples. These are avoidable and rarely correspond to any real service from the issuer.
Other fees come with nearly every card, but responsible use keeps you clear of them. Pay late, for example, and issuers often charge a late fee of up to $40. Paying on time each billing cycle avoids that, and you can even schedule a payment in advance through the card’s website or app.
4. Small Credit Limits
It’s best to avoid issuers known for handing out low credit limits. A small limit makes it more likely you’ll use over 30% of the credit available to you, and that can drag your credit score down.
This can be hard to find out ahead of time, since issuers generally don’t tell you your limit when you apply. Still, you can call the card company and ask what a typical credit line looks like, or research the limits other cardholders have been given.
A small limit can affect your credit utilization ratio, one of the biggest factors in your credit scores. Credit utilization is how much you owe compared with how much credit you have. With a $1,000 limit and a $500 balance, your utilization is 50%.
The standard advice is to keep utilization under 30%. The lower you keep it, the better your credit scores will be.
And if the card pays rewards, a low limit also caps how much you can earn.
5. Limited Reporting to the Credit Bureaus
For building credit, the ideal card reports to all three major credit bureaus: Equifax, Experian and TransUnion. These bureaus put together the credit reports your scores are based on.
A card that doesn’t report to all three can cause trouble, because you can’t know which bureau a future lender will pull your report from.
Say a lender asks for your TransUnion report but your card only reports to Equifax and Experian. That lender may not see any of your credit activity.
