While advertisements and store cashiers would have you think of opening a new credit card as something to be done with only a few moments thought — perhaps a five-minute process right at the register — hastily applying for a new card on a whim can lead to all kinds of trouble down the road when you’re hit by fees you hadn’t anticipated or limitations you hadn’t considered.
Yes, while it’s easy to be lured in by the promise of hefty signup bonuses and new cardholder discounts, credit cards should not be opened lightly. Credit cards are real financial products — ones that can have real financial consequences when they’re not used responsibly.
Before you start filling out that new credit card application, you should take the time to consider all of the facets of the card you’ve chosen to add to your wallet by asking yourself these three important questions.
How Much Will the Card Cost?
Although credit cards can be enjoyed without paying a cent for the privilege, doing so requires choosing the right card and using it responsibly. That’s because, at face value, all credit cards have the potential to cost you money, be it in fees or interest payments.
That’s why it’s important to consider the real cost of a specific credit card before you apply. This means more than glancing at the annual fee; you should look at all of the possible fees and interest charges — as well as the potential rewards and benefits — to determine what the card will cost you to carry. In general, you should consider:
- Annual fees: Many cards will charge an annual fee; these fees are generally charged within one to two billing cycles of opening your account — unless the first year’s fee is waived — and then on your account anniversary each year thereafter.
- Processing or program fees: These are typically one-time fees charged by subprime credit cards that must be paid when you open your account.
- Maintenance fees: Most commonly charged by subprime cards, maintenance fees are usually billed monthly.
- Rewards rates & caps: Credit card rewards can be extremely valuable when earned and redeemed wisely, but cards with high-rate bonus rewards categories often cap your earnings.
- Signup bonus value: Credit card signup bonuses can be worth hundreds of dollars in cash back, points, or miles, but usually require hitting a minimum purchase amount.
- Benefits value: Many travel and points cards offer extra cardholder benefits, such as annual travel credits or free hotel nights, that can add a lot of value to the card.
- APR & grace period for new purchases: The most common use of your new card will likely be to make purchases, so make sure you know the interest rate you’ll be charged, as well as how long you’ll have to pay off your balance before interest accrues.
- APR & fees for balance transfer: If you intend to use your new card to consolidate debt through a balance transfer, be sure to note not just the APR, but also any applicable balance transfer fees.
- APR & fees for cash advances: Most cards charge a higher interest rate for cash advances than for other transactions, and cash advances start accruing interest as soon as they post to your account.
In the end, the true cost of any given credit card will vary depending on how it is used by the individual cardholder as well as by the card itself. For example, a high-rate rewards card could earn enough rewards to make an annual fee worth paying, but only if you’ll actually spend enough (responsibly) during the year to earn those rewards.
How Will the Card Impact Your Credit?
Another important factor to consider before opening a new card is how that new card will impact your credit profile. Every time you obtain a new credit product, your credit profile and scores will be affected, and those impacts are rarely for the better.
For one thing, filling out a new credit card application will result in a hard inquiry showing up on at least one of your credit reports, if not all three. Depending on how many hard inquiries you currently have, adding another one could cause your credit score to decrease.
A new credit card will also affect your average account age — and not for the better. Combined with your credit history length, the age of your accounts is worth up to 15% of your FICO credit score, and older is better so far as your score is concerned.
If you have a limited credit history or a low average account age, opening a new account could cause your credit score to decrease as your account age drops.
What’s Hidden in the Fine Print?
The final question you should ask — and answer — about a card before pulling the trigger is what might be lurking in the card’s fine print. While this doesn’t necessarily mean going through the terms and conditions documentation line by line, it does mean investigating any important asterisks or hidden details that could impact how you use the card.
For example, many cards with high-rate bonus rewards categories cap the rewards you earn in a given quarter or year, a limitation that could mean you won’t get the value you expect. And signup bonuses almost always have spending requirements and time limits that need to be accounted for to earn the bonus.
If a card offers an introductory interest rate or special financing deal that you plan to use, make sure to read the fine print for the offer carefully. Some intro-APR deals, for instance, may only apply to certain types of transactions or for a certain period of time. And many store cards with special financing use deferred interest, which means you need to pay off the full financed amount before the terms expire to avoid being charged interest on the whole purchase.
Additionally, many issuers will have restrictions that may impact your ability to get approved for the card at all. Chase is the most notorious, with its 5/24 Rule, a restriction that means you can’t qualify for a new Chase credit card if you’ve opened five or more credit cards within the last 24 months. Most issuers also have limits on how often you can earn a signup bonus for a credit card or card family.
Always Do Your Homework Before You Apply
The next time you think about opening a new credit card account, don’t let a pushy cashier or flashy signup bonus hasten your application. Taking the time to research a new card before applying can not only save you money, it can help ensure you don’t waste a hard inquiry on a rejection or damage your credit score with an ill-timed addition.