6 Credit Card Red Flags to Watch Out For

All credit cards charge fees, but be wary of those that aren’t considered standard. For example, you probably can’t avoid cash advance fees or balance transfer fees (unless the card is promoting a no-balance-transfer-fee offer). But keep a wary eye out for less common charges, such as application fees, activation fees, membership fees that aren’t related to your typical annual fees, and account maintenance fees. And if you frequently travel overseas or often make international purchases, you’d also be wise to avoid any card that charges foreign transaction fees.
 
It’s also important to be aware that many credit cards charge annual fees, which can range anywhere from $25 to $700. Before applying for a card, be sure its annual fee is worth it to you. For example, if you’re an avid traveler who enjoys luxury, it might make sense to pay for a premium travel rewards card – after all, the card might bear benefits like hotel credits, airport lounge access, and free checked bags. But the same card might not be worth it if you rarely travel or tend to use a credit card only for everyday expenses like gas and groceries. If the card offers no useful benefits, rewards, or perks, ask yourself whether the annual fee is warranted.

The annual percentage rate (APR) on a credit card is the credit card’s interest rate. Generally, the higher your credit score, the lower your APR will be. If you pay off your entire credit card balance each month, you won’t be charged interest. But if you plan to carry a balance, even if only occasionally, you’ll be charged interest on that balance.
 
You can go to the Federal Reserve’s website to check out the current average APR before you apply for a new credit card.1 Doing so can give you an idea of what’s customary. If you come across a card with an uncharacteristically high APR, it’s important to decide whether the card is worth it. Paying off debt can be challenging when you carry a balance on a high interest rate credit card, but if you plan to pay off every statement in full, the high APR might not be a deterrent if the card is otherwise a good fit.

Many credit cards offer rewards. But watch out for reward programs where the points, miles, or cash back you earn are only good for a certain amount of time. Instead, look for a card with rewards that will never expire. This ensures that you’ll have enough time to use your hard-earned rewards – and plenty of time to save up as much as you’d like.

Most credit cards have a credit limit, which is defined as the maximum amount you can charge to your card at any given time. You may want to avoid cards with too high or too low credit limits for two main reasons.
 
First, a credit card with too low a credit limit can negatively impact your credit utilization ratio, particularly if it’s your first or only credit card. Your credit utilization ratio is calculated based on the amount you spend on the card versus the amount of available credit you have. For example, if you have only one credit card with a $1,000 credit limit, and you make a $600 purchase, your credit utilization ratio is 60%. A high credit utilization ratio can negatively impact your credit score, so it may be wise to avoid cards with low credit limits if the amount you plan to charge on a monthly basis keeps your utilization ratio high.
 
This is an important consideration even if you intend to pay off your balance in full every month, as credit scores can be calculated at any point in the month. According to FICO, keeping your credit utilization ratio below 10% can help you build your FICO score, assuming you’re consistently paying bills on time.²
 
Second, a credit card with a high credit limit can seem like a great thing – especially for your credit utilization ratio. But depending on your spending habits, it could cause financial problems. Remember that no matter what your credit card limit is, you are still responsible for paying off whatever you charge. If a high credit limit tempts you to overspend, you might find yourself racking up a bill that’s hard to pay off.

If you’re looking to get a secured credit card to help establish or rebuild credit, it’s a good idea to choose one that offers upgrade opportunities. Secured credit cards require you to make a refundable deposit that serves as your credit limit – and as collateral if you can’t make payments. If the secured credit card issuer offers upgrade opportunities and you demonstrate financial responsibility, you could qualify for an upgrade to a traditional, unsecured card and reap the benefits of rewards, a higher credit limit, and no collateral.
 
However, if the secured credit card does not offer upgrades to an unsecured card, you might not be able to get the refundable deposit back, unless you close the account. And it’s generally not recommended to close a credit card account because doing so can negatively affect your credit score.

Credit card ads with attractive offers displayed front and center are bound to catch your attention, but remember: When you agree to open a new credit card, you’re going to sign a contract with the card issuer. Always read the fine print before you get too excited about any offer, as it could reveal some of the red flags mentioned above. For example, an ad that offers a rewards program may not be as enticing if the terms and conditions reveal that those rewards will quickly expire.
 
The good news is that credit card companies generally include a link to the card’s terms, conditions, interest rates, and fees right on the credit card’s advertisement page and application page. It’s wise to review all fine print before applying.