Having a credit card can be beneficial. They allow you to build your credit, secure hotel rooms and rental cars, and even earn rewards. However, there are tons of hidden dangers of credit cards that can outweigh the potential benefits if you aren’t careful. Here are eight you should avoid.
1. Annual Fees
Not every credit card comes with an annual fee, but many do. Even though this fee is on your agreements, it’s easy to overlook if you don’t read the fine print.
Additionally, many credit cards waive the fee your first year. This makes it easy to forget that the charge is coming. By forgetting you may be unprepared to cover the fee without it becoming debt. Considering that the average annual fee for cards that have them comes in just shy of $150, that’s a pretty big expense to overlook.
Plus, if the fee is added to your balance, you could end up paying interest on the amount. If your credit card tends to be maxed out, it also pushes you over your limit, and can damage your credit.
In many cases, the average consumer should look for credit cards with no annual fee. This can eliminate this hidden credit card danger entirely.
A credit card gives you the ability to spend money you don’t actually have, and can make it easy to overspend. When you use a credit card, it doesn’t have the same psychological impact as using cash, especially since you know you can spread out paying for the purchase over time.
Additionally, if your monthly payment continues to feel reasonable, it may inadvertently serve as encouragement to spend more. A credit card creates the illusion that you have more money than you actually do, so you may buy things you wouldn’t otherwise.
Ideally, if you can’t afford to pay off your entire credit card balance at once, it’s best to reconsider making the purchase. This helps you avoid this credit card trap.
3. Promo Rates
In some cases, introductory and promotional rates come with a big caveat buried in the fine print. With some credit cards, if you don’t pay off the balance that is tied to the special rate before the rate expires, you don’t just owe new interest at the usual rate, but back interest too.
This is especially common on store credit cards. For example, you may have a 0 percent interest rate for six months on a $500 purchase. But, when that six month period is over, if you haven’t paid off that $500, the regular 29 percent rate kicks in not just going forward, but retroactively to the time of purchase. And that doesn’t just apply to your remaining balance, but for the full $500, even if you only had $1 to go.
While the above scenario doesn’t always occur, it can happen on certain credit cards, so reading the fine print about any promo rates is a must.
4. Cash Advances
Most credit cards give cardholders the ability to pull available funds in cash. However, these transactions can come with high-interest rates, even on cards with low rates for standard purchases.
The cash advance interest rate is usually in your credit card agreement, so it’s wise to review it before pulling money. That way you know if there is a different rate for that transaction and can make smarter choices about how to proceed.
5. Foreign Transaction Costs
Credit cards can be incredibly convenient when traveling internationally. But it’s important to understand that using your card outside of the US can come with a steep price tag.
First, some cards have foreign transaction fees, which are usually a set percentage of the purchase price. A 3 percent fee is the most common, though the actual amount can vary from one card to the next. It is important to note that some cards don’t charge foreign transaction fees. So, if you shop overseas regularly, those cards will be your best option.
Second, when you shop overseas in a foreign currency, including online purchases from international companies that don’t operate in US dollars, you also have to contend with exchange rates. Since your card is based in US dollars, the credit card issuer has to convert some currency into the local one.
Credit card companies don’t always use the most favorable exchange rates, so you could end up paying more than you would have you changed physical dollars into the local currency. However, they may have better exchange rates than airport kiosks and other popular tourist options, so you may want to see which option works out better.
6. Rewards vs. Interest
Many credit cards tout their rewards programs to entice cardholders to spend. However, if you carry a balance, your rewards are usually offset by interest payments.
For example, if you make a $1,000 purchase and earn 1 percent cash back, but have an average interest rate of just below 17 percent, you have to pay the balance off immediately to come out ahead. Otherwise, that 1 percent cash back, or $10, is wiped out by the $14 interest charge in the first month.
Unless you pay your balance in full every month, your rewards usually won’t make up for the interest you are paying. However, if you do make sure you always pay in full, you can actually come out ahead.
7. Chasing Balance Transfer Benefits
While opening a new car to get a special balance transfer rate isn’t inherently dangerous, doing so repeatedly is risky. Every time you open a new card, you have to apply. As part of the application process, a hard pull on your credit report occurs, and too many inquiries can harm your credit score.
When your credit score goes down, it becomes harder to get new credit or land low-interest rates. While your balance transfer may help you save on old purchases, new ones may cost you more.
Plus, relying on balance transfer rates to make your payments manageable usually signals a larger problem with debt. While it may help in the short-term, if you don’t stop acquiring new debt, you could end up deeper in the hole.
8. Canceling a Card
Surprisingly, canceling a credit card can actually damage your credit. Since your credit score factors in your credit utilization ratio, a comparison of your credit lines to the amount you use, shutting down a card can make your financial situation look worse, not better.
When you close a card, any available credit on that line disappears. This means, if you hold a balance on another card, the amount of credit you are utilizing goes up, causing your score to fall potentially.
Similarly, canceling a card impacts the average age of your credit accounts, something else that affects your score. If your average age goes down, you score may fall too.
This can be especially disheartening to individuals who are struggling to get out of debt and think that closing a card is a wise move or for those who are required to close the card as part of a debt repayment plan agreement. Suddenly, their score tumbles even though they haven’t made a mistake like missing a payment, making them feel worse than they did before.
Now, this isn’t to say that canceling a card is always a bad choice. Instead, it’s important to recognize your score could change if you do, allowing you to plan for the possibility.
Can you think of a hidden credit card danger that didn’t make our list? Share it in the comments below.