If you are not getting 10-15 credit card offers in the mail each week, you are either 12 years old or you are living in a cave. In the beginning, cards used miles and points, however, the current wave of offers includes "cash back". That is the bait and you my friend are the fish.
Generally the offer states that you literally get a check for 1%-5% back on purchases made with the card. In return, the interest rate may be a little higher than a non-cashback card or maybe there is a higher annual fee. People are looking at the bait and filling out the application before really looking into the full offer.
Here are some things to consider before you fill-out that credit application:
- The 30-day rule - Credit card companies always have a clause in their terms that allows them to change ANY of the rules provided they send you 30-day written notice. Now, you should not expect a nice form letter mailed to your house showing you the changes. Instead, they will send you a little booklet of all the terms and conditions. You are well advised to read these things instead of just tossing them in the garbage (like I used to do).
- Transaction Fees on Balance Transfers- This one is great. You currently have an 18.95% credit card with a $3K balance. You see an offer to move that balance to at 15% card. Hmm. I can save almost 4%. Not bad. Well, stop for a second. Does the new card have a Transaction Fee applied to balance transfers? Most cards do and the average fee is 3%. So to move your $3K balance, be prepared to pay $90 in fees (although most cap it at $75.00).
- Is there an annual fee? If yes, forget it. Why pay a company $50/year just to have the ability to spend money you don't have? The only way I would recommend paying an annual fee is if you are using the card for the sole purpose of moving a balance from another card because of the lower interest rate. However, do the math to make sure you are coming out ahead. If you are moving a $3k balance from a 15% interest rate to a 6% interest rate, then fine, it makes sense. (But, see my point on Transaction Fees above.)
- What is the cash back incentive limit? The only place you will see this on the application is in the Terms and Conditions and generally in a size 2 font. Most cards limit your cash back rebate to $250-500 dollars in a calendar year.
- How long is the 'introductory' interest rate good for? Again, see the size 2 font Terms and Conditions. If you are not planning to payoff the card at the end of the month and you insist on letting balances rollover, you better know the exact date when your nice, shiny 5.99% into rate turns into an 18.95% interest rate card. Put it in your calendar or do something to be sure you remember to check on it.
- DO NOT take cash advances - So you are in Vegas and you blew your wad on Roulette but something inside is telling you your luck is about to change. You whip out the wallet and find your 5.99% interest credit card and are willing to pay that interest for a while, right? No, bad! Cash Advances have their own special interest rate on most cards and they are usually at least 10% higher!
- Are you an international traveler? Be careful that your card doesn't add a "Foreign Currency Transaction Fee". That fee, on average, is an additional 3% on any purchases made outside of your home currency.
- Missed a payment? You are totally screwed. If you miss a payment on a card, you can expect your interest rate to skyrocket. You can read about it on your Terms and Conditions. I am reading one now online and here is what it says, "However, all your APRs may automatically increase up to the 31.99% variable default rate if you default under any Card Agreement that you have with us."
- Do I need this card? Why? I use credit cards for the points and miles. BUT - I pay off every card at the end of each month so I am not hit with financing charges. IF you can do this (not plan to do this, but CAN do this) then it's OK. To make sure I stick with my little policy, I log into my checking account and send the payment to the credit card right when I get home from making a purchase.
While this may be a nice list of things to watch out for. The most important point is to really think about why you need a credit card. If you would just exercise a little patience, you would see that you can easily save for what you want and pay with cash. Or - the other viewpoint is to simply learn to live without the things you cannot afford.
- Jay
Related:
Me Frugal? No, I just watch MY cash
How I Bank and Manage Cash
Generally the offer states that you literally get a check for 1%-5% back on purchases made with the card. In return, the interest rate may be a little higher than a non-cashback card or maybe there is a higher annual fee. People are looking at the bait and filling out the application before really looking into the full offer.
Here are some things to consider before you fill-out that credit application:
- The 30-day rule - Credit card companies always have a clause in their terms that allows them to change ANY of the rules provided they send you 30-day written notice. Now, you should not expect a nice form letter mailed to your house showing you the changes. Instead, they will send you a little booklet of all the terms and conditions. You are well advised to read these things instead of just tossing them in the garbage (like I used to do).
- Transaction Fees on Balance Transfers- This one is great. You currently have an 18.95% credit card with a $3K balance. You see an offer to move that balance to at 15% card. Hmm. I can save almost 4%. Not bad. Well, stop for a second. Does the new card have a Transaction Fee applied to balance transfers? Most cards do and the average fee is 3%. So to move your $3K balance, be prepared to pay $90 in fees (although most cap it at $75.00).
- Is there an annual fee? If yes, forget it. Why pay a company $50/year just to have the ability to spend money you don't have? The only way I would recommend paying an annual fee is if you are using the card for the sole purpose of moving a balance from another card because of the lower interest rate. However, do the math to make sure you are coming out ahead. If you are moving a $3k balance from a 15% interest rate to a 6% interest rate, then fine, it makes sense. (But, see my point on Transaction Fees above.)
- What is the cash back incentive limit? The only place you will see this on the application is in the Terms and Conditions and generally in a size 2 font. Most cards limit your cash back rebate to $250-500 dollars in a calendar year.
- How long is the 'introductory' interest rate good for? Again, see the size 2 font Terms and Conditions. If you are not planning to payoff the card at the end of the month and you insist on letting balances rollover, you better know the exact date when your nice, shiny 5.99% into rate turns into an 18.95% interest rate card. Put it in your calendar or do something to be sure you remember to check on it.
- DO NOT take cash advances - So you are in Vegas and you blew your wad on Roulette but something inside is telling you your luck is about to change. You whip out the wallet and find your 5.99% interest credit card and are willing to pay that interest for a while, right? No, bad! Cash Advances have their own special interest rate on most cards and they are usually at least 10% higher!
- Are you an international traveler? Be careful that your card doesn't add a "Foreign Currency Transaction Fee". That fee, on average, is an additional 3% on any purchases made outside of your home currency.
- Missed a payment? You are totally screwed. If you miss a payment on a card, you can expect your interest rate to skyrocket. You can read about it on your Terms and Conditions. I am reading one now online and here is what it says, "However, all your APRs may automatically increase up to the 31.99% variable default rate if you default under any Card Agreement that you have with us."
- Do I need this card? Why? I use credit cards for the points and miles. BUT - I pay off every card at the end of each month so I am not hit with financing charges. IF you can do this (not plan to do this, but CAN do this) then it's OK. To make sure I stick with my little policy, I log into my checking account and send the payment to the credit card right when I get home from making a purchase.
While this may be a nice list of things to watch out for. The most important point is to really think about why you need a credit card. If you would just exercise a little patience, you would see that you can easily save for what you want and pay with cash. Or - the other viewpoint is to simply learn to live without the things you cannot afford.
- Jay
Related:
Me Frugal? No, I just watch MY cash
How I Bank and Manage Cash
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