When we are ready to make a big purchase for a house, a car, or to get approval for a loan, we all know the first thing that gets looked at is our credit score. Credit cards are great for that, and some offer many perks other than helping you get a better credit score. Reward programs and even competitive interest rates are all wonderful advantages to owning a credit card. However, credit cards aren’t all they seem. If you feel as if you’re paying too much to hold a credit card, there are three things you need to know to avoid giving these companies more many than they should get from you.
Falling for That Seemingly Attractive 0% APR Promotion
Many credit card stores love to offer this type of deal. For example you want to buy a new television and a store that says they’ll provide you interest-free financing for 24 months for any purchase of at least $2,000. The issue with this scenario is what will have once the 24 month period is over. You might think that your account will only start to accumulate interest from that point forward. In actuality, if you were to have any balance on your account — even if it were a penny — you will get charged for all of the interest that you accumulated the entire time. Credit card companies are smart in this game and love to provide these promotions known as “deferred interest” financing. You don’t really have that 0% interest rate. The interest rate you’ve had from the beginning is most likely high (most rates close to 30% is common).
What these companies are saying to you is that they agree not to hold you accountable for paying the interest rates so long as your balance is paid, in full, in the agreed amount of time. Let’s day you decide you are ready to make that $3,000 purchase for a living room set and the store you are shopping at says they would like to give you interest-free financing for a year. The only condition is you must pay at least $100 on a monthly basis, and you will have a standard interest rate of 29%. In that time, you can believe that your deferred interest rate will accrue to $700. That means, even if your month-to-month payments may be a balance at $1,800 by the end of the year, your thirteen-month statement may show that you have a total due balance of $2,500 the minute your deferred payments surface.
You should know this game and play it well yourself before you agree to take any of these promotions. Pay off your balance entirely before that interest-free promotion is over. Another excellent idea would be to get a non-store or traditional credit card that has a 0% APR period where there is no interest financing.
The Real Reason Behind Credit Card Rewards
The true reason these companies want to give you all these great deals is because they want your business. While the introductory bonuses are there to attract new customers, it is the ongoing promotions that are just as important — they make people want to spend. For example, if you need another 800 airline miles to get that free flight, and you know your card rewards you with two miles for every dollar spent, you might end up spending $400 although you do not need it just to accumulate those miles.
Having a credit card rewards program is useful if you never keep a balance on the account. Even if a credit company were to offer their best rewards to you (rates of 5-6% on certain purchases), it’s not hard to notice how paying rates of 15-18% can diminish the value of any reward you receive. Not only will that leave you with a lot of debt and a misuse of the rewards programs, the two combined will negatively hurt your credit score. MyFico says that a balance left on your credit card correlate to your credit limit you have, which widely determines your scoring. You may not just have to be worried about interest and principle – it’s hard to obtain other credit too.
It’s Not that Costly to Rebuild Your Credit
The lower your credit score, the lower your chances are of qualifying for great credit card deals. Still, it doesn’t mean those people have to accept the crazy interest rates and charges. Some card companies will make it seem that there isn’t a lot of choices for you. The First Premier Band credit card, for example, has a $95 entrance charge, a $45 yearly fee, a 36% APR, and a $6.25 monthly fee when the month is over. It would be a better idea to apply for a secured credit card where you make a security deposit that will be equal to the card’s credit limit. It might be annoying because your money is tied up, but the costs of these cards are a lot more reasonable. Wells Fargo offers secured cards, and they only have a 19.24% APR and $25 annual charge. You’ll still have your credit information being reported and can always upgrade to the unsecured cards in the future.