Having a credit card is a great way to schedule your bills, track your spending, and enjoy rewards or cash back. Provided that you don’t utilize your credit card to purchase something you can’t afford and don’t exceed the credit limit, this tool will help you stay on top of your personal funds and can replace secured personal loan in the case of emergencies.
On the other hand, service providers want to make money by lending you finances you don’t have. Here are the top 5 red flags to watch out for if you are using a credit card.
Are Credit Cards Dangerous?
We are living in a world where taking out credit is normal. If you don’t have enough savings or cash straight away, you may easily fund a big-picture purchase and cover immediate expenses using a credit card. Issuers charge you a fee and interest rates for getting this privilege of having additional funds in your pocket.
It is a common practice but some service providers may just look for ways to take as much of the client’s funds as possible. Such companies often target consumers with bad credit who struggle financially and can’t qualify for alternative lending options.
Getting a secured personal loan may be useful for borrowers with less-than-stellar credit but they should provide collateral so this lending option may present higher risks unless you can’t qualify for unsecured credit tools. Choosing a fast payday advance in your phone is a quick and secure method of improving your finances for the short term. You can request a small sum for a few weeks till the next salary day.
It can be tough to select the right credit card with the lowest rates and the highest credit limit, especially when you are a poor credit holder. Consumers with a rating less than 629 should be very careful when applying for credit cards and look for the following red flags to avoid them. Remember that even if your choices are limited, you should compare the terms of several providers in order to pick the right credit card for your financial needs.
5 Credit Card Red Flags
1. High Interest Rates
It is a convenient option to use your credit card to pay for items and things you can’t afford right away. It offers you a sense of accomplishment and the ability to fulfill your financial needs. However, you need to remember about interest rates in case you carry a card balance each month.
Consumers who pay down their balance till the end of the month won’t need to pay any interest, but monetary struggle and tough financial disruptions make credit card owners have some debt. The interest rates offered by credit card issuers depend on the client’s creditworthiness. The higher your score, the lower your interest rates will be.
You may explore interest rates using a free online tool from the CFPB. It allows borrowers to explore the range of possible interest rates and calculate how much they will owe if they accept a certain offer. Besides, the rates for mortgages are updated twice a week on this web platform.
2. Annual Fees
Sometimes, a recurring annual fee is charged by service providers to cover the expenses. For instance, you may be demanded to pay a $250 annual fee for using a card that offers you free domestic flights every year. It is worth paying such fees if you know the value of the gift will be higher than your fee.
Generally, providers may require a high APR to earn additional money on you. Consumers without steady employment should stay away from such credit options as they don’t have a stable cash flow and may end up being deep in the debt cycle. Instead, search for credit tools without annual fees.
3. Additional Charges
Apart from regular interest rates and APR, consumers may come across additional fees. Credit card issuers may charge so-called activation fees, origination fees, application and processing fees, as well as membership fees and maintenance charges. In the end, it seems that you have to pay more in fees than you actually obtain to cover your financial needs.
You should avoid these unnecessary charges if you want to save funds. Unsecured credit cards that don’t demand collateral usually come with such charges. Always read the fine print of the agreement to understand the lending conditions. Exceptionally high late charges and overdraft fees may also be red flags.
4. Credit Limit
The credit limit you are offered will most likely depend on your creditworthiness. A low credit limit will influence your credit utilization ratio, which is important for your credit rating. This is the amount a person owes as a percentage of their available credit. Hence, if a consumer has a $1,000 credit limit with a $500 credit card balance, their credit utilization ratio is 50%.
Experts advise borrowers to keep this ratio below 30% not to damage their credit scores. Those who get a card that boosts their credit by more than 30% will notice their scores being affected by the hard credit pull, the increase of available credit, and the total length of time of having this credit.
5. Limited Credit Reporting
It is great to find a credit card issuer who will report your payments to all major credit reporting agencies – Experian, Equifax, and TransUnion. Later, the credit report is compiled based on the reported information, which forms your credit rating. A red flag is accepting a credit card that doesn’t offer complete credit monitoring and reporting.
The main reason is that a borrower won’t know what agency a potential future creditor may be pulling their credit report from. In other words, if your credit card reports just to Experian and TransUnion but the creditors pull your report from Equifax, they won’t find your credit activity. The value of revolving credit outstanding in the USA increased over the past 25 years. This figure amounted to 1.01 trillion US dollars in 2020. Unlike installment loans, revolving credit doesn’t have a fixed number of payments.
The Bottom Line
In conclusion, here are the top red flags of credit cards to look for. Make sure you avoid them or search for alternative lending tools to help you finance important needs and make big-ticket purchases without hurting your rating or offering sky-high interest rates.