Odds are you don’t have much money on you. That is, you don’t have very much physical cash. On the other hand, it’s becoming increasingly likely you have credit cards and debit cards at your disposal. Or perhaps you use your phone for payments, through the number of virtual payment applications out there. Either way, credit cards, debit cards, and other cashless payment systems are becoming the norm.
That’s bad news for your server or valet, who is probably hoping you have some extra cash for a tip.
But you’re not alone. Paying with plastic is pretty much the standard these days. And though your debit and credit cards might have a web of confusing fees, terms, and conditions associated with their use, most of us don’t give that much thought. We just swipe, insert, or tap; grab our purchases; and get on with our day.
It’s never a bad idea, though, to take stock of your credit cards. If you haven’t shopped around for a new or better card in a while, or even if you’re thinking about applying for the first time, there are certain things you need to know. From wildly varying interest rates, rewards programs, and perks to the issues associated with credit card debt, you need to do a bit of research.
If you plan on applying for a new credit card in the near future, here are 10 things you need to take into consideration.
1. You can (and should) shop around
Surprisingly, 38% of people in a recent survey said they had not changed their most-used credit card in the past decade or ever.
First and foremost, you need to know not all credit cards are created equal. There are many choices, with a wide range of interest rates, fees, perks, rewards, and credit limits. Although you’ll probably find an application or two in your mailbox every so often, be sure to shop around and look at all of your options. A good place to start? The top credit card picks from sites, such as Cardratings.com. Lists like these can help you zero in on the right card.
2. Pay attention to annual fees
Credit card annual fees may range from $0 to $450 and more for ultra fancy cards.
Another important thing to know before deciding on a card is some come with annual fees. This varies from card to card and company to company, but sometimes a fee like this can sneak up on you. Before sending in your application, check if there’s an annual fee. Usually, the fee isn’t terribly expensive. But if you don’t plan on using the card much, you might be better off going with an offer that doesn’t have an annual expense just for the privilege of carrying the card.
3. Sign-up bonuses can pay, if you’re disciplined
Only 2% of people said they signed up for their most-used credit card because of a sign-up bonus, though that may be different for Chase Sapphire Reserve users. The CSR card offers 50,000 bonus points after spending $4,000 on purchases in the first 3 months, which is worth $750 toward travel.
Credit card companies use incentives to get you to sign up. There’s nothing wrong with that, but sometimes customers buy in without realizing what they’re getting themselves into. If you’re keen on taking advantage of sign-up offers or bonuses, make sure you’re disciplined and vigilant about meeting the requirements and paying off your balances. Some people — those who do it right — manage to earn themselves significant bonuses as a result.
4. Avoid minimum payments
When signing up for a card, a lot of people figure they can get away with just paying the minimum payment every month. Although that’s technically true, it’s something of a psychological trap. If you’re only making minimum payments, you can get caught in a cycle of debt as you’re never really making a dent in the principal. Know what you can handle, and be careful when taking on debt.
What happens if you only pay the minimum on your credit card? Since only a small portion of the minimum payment goes toward the principal, it can take years and thousands of extra dollars to pay off your original balance. A balance of $3,000 with an interest rate of 15%, and a minimum payment of 2% or $25, will take a little more than 16 years to pay off if you only make the minimum payment each month. You’ll also pay $3,640 in interest charges over that time span, more than the original balance and far more than any cash back rewards you’ll receive.
5. Interest rates are really high
The average credit card interest rate is over 16%.
When you use a credit card to make a purchase, you’re borrowing money. And the credit card company is charging you for the privilege in the form of interest. Your goal, as a credit card user, should be to always pay off your card in full every month. If you absolutely can’t, make sure to have as low of an interest rate as possible. This will save you tons of money. When shopping around, look at the available interest rates, and even try negotiating for a better rate by calling your credit card company.
6. Perks are abundant
A whopping 83% of credit cards tout perks that may save you money (as long as you’re a responsible user).
Some cards offer perks in addition to rewards. If you take a look at the fine print or some of the incentives and sign-up bonuses, these perks are often listed. For example, some cards offer roadside assistance or even insurance coverage for rental cars. Some perks aren’t made explicit. So do your due diligence, and research to find places where perks can save you money.
7. Credit card debt
The average household with credit card debt has balances totaling $16,748.
We’ve touched on debt, but it’s worth focusing on again. Credit card debt is very easy to get into and often very difficult to escape. You might find yourself spending money more loosely with a credit card in your wallet, seeing it as an untapped source of cash. Again, this is a bit of a psychological trap. If you do plan on using your card, do so sparingly, or pay off your balances in full. This will help you stay out of debt and build wealth. If you don’t trust yourself with a credit card, don’t get one!
8. Dangers for young consumers
Some studies show young people who dig themselves into a deep hole might never be able to get out — and you might die before paying your debts.
If you’re young, a credit card can be very attractive. There are a lot of misconceptions young people have about credit cards, with some thinking they’re essentially “free money” they can use to buy things. This, obviously, leads to big problems. We’ll mention it yet again: This type of ignorance will trap you in a debt cycle and eat up your paychecks for years to come.
9. Secured and unsecured cards
A secured credit card could be your answer to raising your credit score, and there are plenty of them out on the market.
Another important thing to know is the difference between a secured and an unsecured card. The difference is basically this: A secured card requires a deposit before you can start using it. For example, if you want a card with a $500 credit limit, you need to give the issuer a $500 deposit. This is an option if you have bad credit and need to prove your creditworthiness. If you struggle with debt and are trying to rebuild your credit score, a secured card is a good way to go.
10. Your demographic matters
Depending on your demographic, you might be better (or worse) off than you anticipated. For example, women tend to have better credit scores than men. Men, however, tend to overestimate their creditworthiness and credit scores. Your age also plays a role in your creditworthiness, and all of this together can impact the interest rates you receive from credit card companies. Be aware of your credit score, and don’t take anything for granted.