It’s exhilarating to slip a new credit card into your wallet. However, credit can quickly become debt if you use that new card in the wrong way — or pick the wrong card for your needs.
There are a variety of things you should look at when choosing a credit card. If you want a rewards card to use frequently, you might not mind paying an annual fee. You should also consider the regular APR (as opposed to the introductory rate) and the interest rate. A good interest rate is dependent on how you will use the card. For example, a 20 percent interest rate is fine if you plan on paying off the balance every month.
It pays to ask these kinds of questions before you fill out the application form. Here are nine questions you want answered before you choose a new credit card.
9 questions before choosing a credit card
- Why am I applying?
- How does this card compare to other options?
- What kind of rate and credit line can I get?
- What’s the regular APR?
- When do you reduce or revoke rewards?
- Can anything I charge be used against me?
- How can I get off the hook as a co-signer?
- How do you protect against credit card fraud?
- How will I be treated if I fall behind?
1. Why am I applying?
The “very first question” you should ask is, “Why am I applying for this card? Why do I need this card?” says Bruce McClary, vice president of communication for the National Foundation for Credit Counseling.
Some positive reasons: The card has low or no fees, a lower interest rate or offers a rewards program that suits your spending habits.
Do you pay off your credit card balances every month? If so, “you don’t care what the interest rate is because you won’t pay any,” says Ric Edelman, author of “The Truth About Money.” “But you care about the (annual) fee,” he says.
If you run a balance, you want the lowest rate you can get, even if that comes with an annual fee.
2. How does this card compare to other options?
If you’re shopping for a card, chances are you’re comparing card terms. But what if an issuer sends you an enticing offer in the mail?
It’s difficult to pick one in isolation, without doing a side-by-side comparison. It’s smart to compare several credit cards before you apply for one.
3. What kind of rate and credit line can I get?
Some cards will give you a range of rates you could get, but often that window is pretty wide. Other cards may offer a specific rate (or terms) and either approve or reject you.
If you’re operating totally in the dark, you have another option: Apply by phone and push for an answer on your rate and credit line before the account is opened. While there are no guarantees, sometimes you can get an answer.
4. What’s the regular APR?
According to the CARD Act, if a card offers a lower interest rate during an introductory period, the promotional rate has to last at least six months. While that introductory offer may be appealing, the regular rate is what you’re really buying.
So find out when the introductory APR expires and what the new rate will be. You can find this information in the terms and conditions for the card or you can ask a service representative.
Another smart question: How long is that grace period? A card can have different grace periods for balance transfers and cash advances than it does for purchases.
5. When do you reduce or revoke rewards?
If you’re getting the card for points or rewards, this is one you definitely need to ask, says Josh Frank, former senior researcher with the Center for Responsible Lending. Some issuers will revoke rewards if you’re late with a payment by even one day, he says.
“A lot of times, the answer they will give you is that they can take away or reduce your rewards for any reason,” he says. While that’s true, the issuer will have a policy on revoking or reducing points, and that’s what you want to ask about, he says. Under what specific circumstances would they reduce or eliminate a customer’s points?
In most cases, “this is one the customer service agent should know the answer to,” he says.
Compare rewards credit cards to find a card that offers perks tailored to your likes.
6. Can anything I charge be used against me?
Some card issuers use your purchase records to assess your ongoing creditworthiness.
That means if you suddenly use your card to purchase retread tires or pay for a session with a marriage counselor, you could see your APR climb or your credit limit fall, Frank says. If you see this practice as an invasion of privacy, ask beforehand if the issuer does this, he says.
How to phrase it: Can my transactions ever be used in rating my credit risk?
And that’s one question the customer service representative “might not known the answer to,” Frank says. “You might want to ask them to transfer you to the credit department manager.”
7. How can I get off the hook as a co-signer?
If you are guaranteeing a card account by co-signing for a college student, ask if you will be on the hook for the debt after the other party turns 21, says Chi Chi Wu, staff attorney for the National Consumer Law Center.
Many times, “there is nothing to prevent the issuers from saying you’re going to be guaranteeing this card 15 years from now — long after junior is out of college,” she says.
In addition, find out exactly what has to be done to get you off the account. Are you free to complete those steps yourself? Or will you need the cooperation of someone who might not want you — and those charging privileges — to go away?
8. How do you protect against credit card fraud?
Federal regulations limit your liability for unauthorized credit card charges to $50. Many issuers cap losses at zero dollars, provided you follow a few rules. So find out how the card would handle charges you didn’t make.
Also, does the issuer monitor usage and shut down the card if it sees out-of-the-ordinary charges or spending locations? That feature can be great if you always use the card for the same types of purchases in the same geographic area, but cumbersome if you’re getting the card for travel.
9. How will I be treated if I fall behind?
While it sounds counterproductive, you want to ask some detailed questions on how the issuer will treat you if you run into financial problems.
Will you lose points or benefits? Will you be hit with late fees or a penalty rate? Ask what those penalties are or look online at the terms and conditions for the card.
Some issuers have programs to slash interest temporarily for customers who get behind. Others don’t. So find out ahead of time what kind of programs the issuer offers that will help you rehabilitate your account and restore your original terms.