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If you're new to credit or trying to rebuild, checking a credit card's terms and conditions before you apply can help you spot red flags that are likely to cost you more and help you less.
First, you'll need to seek out the terms and conditions—otherwise it's possible to apply and get approved without ever seeing them. On the application page, you will likely see a link to a cardholder agreement or terms and conditions. It's often under the "apply" button or near the bottom of the page. Once you've found those, here are some gotchas to look for.
1. Excessive Fees
Check to see whether you will be paying setup and maintenance fees. Even if you are new to credit or have a "subprime" score (below 670), you can do better. Fees in and of themselves are not a red flag. But make sure you know what you are getting in exchange for the fees and that it's worth it to you.
There are credit cards specifically designed for people who are working to build or rebuild credit, and most do not charge fees for setup or monthly maintenance fees. Before you apply, check to be sure that you won't be paying fees that you can easily avoid.
Also check for foreign transaction fees if you plan to use the card for travel. Some cards have them, and others don't. The ones that do typically charge 1% to 3% on every transaction when you're abroad.
2. Ultra-High Interest Rates
If you are able to pay your balance off on time every month, the interest rate won't matter. Still, if you should unexpectedly have to carry a balance, a reasonable interest rate would be nice. In many cases, you won't know your exact interest rate unless you apply.
But the card agreement should give you a range, and the interest rate you get may depend on the federal prime rate and your credit score. (If all cardholders pay the same interest rate, it's likely to be a high one.)
3. Limited Credit Reporting
A new credit card, paid on time every month, can help you build credit. But it can only help if it's reported. If you are trying to build or rebuild credit, you'll want a card that reports to all three major credit-reporting agencies (Experian, TransUnion and Equifax).
Major credit card issuers report to all three bureaus, but if you are using a secured credit card or an authorized-user card to build credit, you want to be sure that it's on all three of your credit reports. Through the end of 2022, you can access your credit reports weekly for free at AnnualCreditReport.com.
When potential creditors check your credit, they may pull your credit report from Experian, TransUnion or Equifax (or more than one). The data used to calculate your credit scores comes from reports maintained by one or more of the bureaus, which is why it's important that all three have your credit card account.
4. No Available Upgrade to an Unsecured Credit Card
If you apply for a secured credit card, look for one that offers to upgrade you to a regular, unsecured credit card or a higher credit limit after a certain number of on-time payments. Secured credit cards aren't meant to be forever, but closing an account can cause a slight drop in credit score. If, instead, you "graduate" to an unsecured credit card, you avoid that issue altogether.
5. Low Credit Limits
Some of the easiest-to-get credit cards come with the lowest limits. That may be true of secured cards, where your deposit is usually equal to your credit limit, and it is true of some store cards. If you are working to improve your credit, you want to pay strategically to keep the low limits from hurting your credit. Because credit scores are designed to look favorably at using just a small percentage of your credit limit, it may pay to be extra attentive to the balance on a low-limit card.
If, for example, you have a credit limit of $250 on a retail card, a shopping expedition could bring you close to your credit limit. Your credit utilization ratio—the percent of your credit limit in use—has a big impact on your credit scores. You can keep a low limit from affecting your score by paying before the statement is issued or by paying balances as soon as they appear online to keep your credit utilization low. Credit experts suggest keeping it below 30%, and below 10% is best.
The Bottom Line
Not every credit card is going to be a good fit for you, and there are a few that aren't a good fit for anybody. Checking out a card's user agreements and terms and conditions can help you understand and compare fees and interest rates to catch any red flags. You can also check the Consumer Finance Protection Bureau's credit card agreement database. Experian CreditMatchTM may help you identify credit cards you are likely to qualify for and that will help you reach your goals.