Need a new credit card? It might be easier to get one today, even if you’ve missed payments in the past. But even if you can qualify for a new card, you need to watch out for potential traps.
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Some cards come with low teaser rates — rates that are in only in effect for a short period of time — that then transform into sky-high rates once the teaser period is over. If you don’t think that you’ll pay your credit card balance off in full each month, you should avoid any card with high rates. If you don’t? You’ll end up paying far too much interest.
According to the Senior Loan Officer Opinion Survey, the Federal Reserve reported that during the first quarter of 2013 7.4 percent of banks said that they had “eased somewhat” their credit standards for individuals applying for new credit cards. The remaining surveyed banks reported that their lending standards remained about the same.
This hasn’t changed much during the year. In October of 2013, the Fed reported that 6.9 percent of surveyed banks said that they had eased their credit standards somewhat for applicants applying for new credit cards. The majority of respondents — 91.4 percent — reported that their credit card standards remained basically unchanged.
At the same time, demand for credit cards has increased. According to the Fed’s October 2013 survey, 18 percent of surveyed banks reported that demand for their credit cards was stronger.
This means that more consumers are not only applying but also qualifying for new credit cards. This also makes it more likely that more consumers will inadvertently use these cards to build up too much debt too quickly.
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Here are some potential pitfalls to avoid after you’ve earned that new credit card.
High Interest rates
Don’t plan on paying off your credit card’s balance each month? That’s a bad financial move. Interest rates on credit cards tend to be high, especially for consumers with weak credit.
A January survey of interest rates found that the average fixed-rate credit card came with an interest rate of 13.02 percent. The average variable-rate credit card came with an interest rate of 15.38 percent.
But those rates are for consumers with solid credit. If your credit is shaky, you can expect your credit card’s interest rate to come in at 20 percent or higher. Make sure that you don’t take out a card with a rate that will send your credit card debt soaring.
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Some credit cards come with low introductory interest rates. But those rates won’t last forever. Make sure you understand that your card’s 7 percent teaser rate might jump to 15 percent, 18 percent or higher after six months. And if you do intend to carry a balance on your card from month to month? Don’t let a low teaser rate trick you into applying for a credit card with an interest rate that will eventually break the 20-percent mark.
Some credit cards come with especially severe penalties. If you pay late, for instance, your interest rate might jump permanently to 24 percent. Others might charge you exorbitant fees for going over your credit limit. Make sure to read the fine print on your credit card application.
The lure of rewards cards
There are plenty of rewards cards out there that let you earn points that you can turn into free airplane tickets or hotel stays. Others give you cash-back bonuses at the end of the year. These are great. But don’t apply for a card just for its rewards. Check out the interest rates and penalties, too. You don’t want to apply for a card that has bad terms just because you are trying to earn a free flight to Maui.
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