August 25, 2022

7 Credit Card Red Flags

Valerie Mellema
Fortune 500 Editorial Contributor

Whether you’re searching for your first credit card or an additional one for a specific purchase, there are things to be aware of. Some credit cards are only available to those with excellent credit scores. Others are made to help you improve your score. A variety of credit cards can also carry red flags and should be avoided.

To choose the right card for your needs, you need to understand what to avoid. Below are some of the common credit card red flags to look for. There’s no reason to choose a bad credit card when so many good ones are available.

1. Extreme Interest Rates

Those with good to excellent credit will qualify for different cards than those with no or bad credit. This is normal. The providers have to protect themselves against consumers who might carry a higher risk. However, sometimes high-interest rates are far and beyond what they should be – even twice as much as what those with good credit could get.

It's important to shop around and find the cards available with low-interest rates. Don’t pay too much interest and waste your money.

2. Excessive Fees

While some credit card fees are far from uncommon, some card issuers add on unusual fees. For instance, you might see an application or processing fee to open the card. Monthly maintenance fees could also be added on. Overdue payment fees and annual fees are common but look at anything beyond that.

Be sure you have a full understanding of the fee structure before applying for a credit card. Also, keep in mind that secured credit cards from well-known providers can be an effective way to go. A security deposit is required, but most of the time, you can earn that back with responsible spending and payments.

3. High Credit Limits

When you see a card with a high limit, it might seem exciting. It’s more money to buy additional items. However, for those who are new to cards or have poor credit, be wary of a high limit. In many cases, a lot of fees and a high-interest rate will be the cost of a high credit limit.

Another issue is that a huge credit limit can cause excessive spending. For someone who has trouble managing their debt, this can exacerbate the situation.

4. Large Annual Fees

Credit cards vary in terms of whether an annual fee is charged or not. When there is an annual fee, make sure that it is reasonable. Anything more than $50 per year is often a red flag. The only exception is for high-level rewards cards, which might have an annual fee of around $100 in some cases.

Without included rewards, fees as high as this are red flags. It’s usually better to keep searching for something that doesn’t take as much out of pocket every year.

5. Insufficient Credit Reporting

For those with poor or no credit, one of the reasons to choose a credit card is to improve your credit score. The best way for that to occur is if the activity on your credit card is reported to all three major credit bureaus: Equifax, Experian, and TransUnion. If this isn’t the case, improving your credit will be more difficult.

Rather than choosing a debit card, a secured or unsecured credit card is better for building credit. Debit cards don’t tend to make an impact on your credit since your payments aren’t reported. Be sure the card you choose reports to all three of the credit bureaus.

6. No Monitoring

Most people can benefit from monitoring, especially those new to credit cards or with poor credit scores. Cards with no option to keep track of payments or monitor credit progress may be better to avoid. Instead, choose a card that includes online account options. Text or email alerts of upcoming payments can also help you pay before bills are due.

Why does this matter to such a high degree? Timely payments to credit accounts and cards make up 35% of your overall credit score.

7. Lack of Available Upgrades

The best credit cards reward you for being responsible and offer a way to build or improve credit. If that isn’t the case, it’s best to look for another card. For example, a secured card might turn into an unsecured one after many months of prompt payments. Other cards might raise your limit after a certain period of time.

Avoid Red Flags and Choose Only Reliable Credit Cards

Credit cards can be a fantastic way to start building credit for future endeavors like purchasing a car or home. However, it’s important to watch for red flags that may cause problems down the line. While it might seem that starter credit cards would have unfavorable terms, that isn’t always the case. Do your research for the best results.

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