Credit card offers are alluring, but you need to look at the big picture before you sign up.
Once you decide which features and rewards you'll really use, make sure you not only understand how the offer works, but also dig into hidden costs and comparison shop.
Remember that credit and debt should be part of your overall financial plan and need to be managed wisely.
I'm inundated with credit card offers and they all seem to be trying to outdo each other. How can I figure out if any of them are worth it? —A Reader
You're absolutely right that credit card sales pitches are everywhere. Whether in the mailbox or online, none of us can escape the constant barrage of offers and incentives. From a marketing perspective, that makes a lot of sense. Credit cards are increasingly a part of everyday life and, according to creditcards.com (using data from the Federal Reserve and the U.S. Census Bureau), the average credit card debt per U.S. adult credit card user is $5,284. Companies know we not only fall for their pitches—we also rack up the debt.
Don't get me wrong. I'm in favor of using credit cards wisely—they certainly make life a lot easier. But I also always urge caution. Not only can credit cards cost you extra money in terms of fees, interest, or a damaged credit score, they can make it more difficult to spend mindfully and they can also increase your financial risk by encouraging you to carry more debt.
Just to set some context, credit card offers generally fall into one of three categories: 1) those that feature a balance transfer or low interest rate, designed for people who are working to get out of debt or who carry a balance month to month; 2) secured cards for people who don’t have a credit history or are rebuilding their credit; and 3) reward cards that offer some type of extra benefit such as travel points or cash back.
Increasingly, the types of offers that you’re referring to are for the last category, reward cards, designed for people with disposable income and a strong credit rating. As you review your options, here are a few things to think about:
1. Look at what a card will cost you—An initial low interest rate, cash back, bonus points or miles may be desirable, but also think about annual fees, foreign transaction fees, late fees and penalties. Some cards with great sounding benefits charge a whopping annual fee. If a travel card charges foreign transaction fees and you travel outside the U.S., it can really add to your bill. If you always pay your bill on time, late fees may not seem important, but it's wise to consider all the potential costs.
2. Decide which reward is the most valuable for your situation—Cash back can be great and easy to understand as a benefit. Travel points or miles can add up to cut your travel costs. But which type of reward is best for your lifestyle? Once you decide that, get into the details. For instance, if you're looking at cash-back offers, don't just focus on the percentage back. Look at the percentage on specific types of purchases—gas, groceries, general—and how that fits with your spending.
Travel cards also vary in how points are accumulated and redeemed. Some offer statement credits; others give you miles to apply to future trips. Some even include travel insurance, entry into exclusive airport lounges, or hotel upgrades. It all can sound alluring, but you have to think practically about how often you’ll actually use the benefits.
3. Read the fine print—None of us like to do it, but here's where you really need to pay attention—especially when it comes to introductory offers. That teaser rate may be great for a few months, but be sure you know when and how it will increase. There may be no annual fee for a year, but what will it be after that? The point is that the great sounding offer may not be so great once you dig a little deeper.
4. Limit the number of cards you have—and use—There's nothing wrong with having a couple of cards with different perks. For example, in order to capture the maximum rewards, you might use one for everyday purchases like gas and groceries and another for travel. Or for security reasons, it can be prudent to reserve one card for online purchases. The potential problems come when you have too many cards.
First, you have to be able to manage your cards wisely so you don't end up overspending and struggling to make payments. Second, you have to think of your credit score. Opening too many accounts in a short period of time can be a red flag to the credit bureaus. Also, you have to be careful with how much credit you use. If your balance is more than 30 percent of your available credit line on any particular card, that could also lower your score.
5. Don't give in to store incentives—While 10 percent off a purchase may sound good at the time, to me, opening a store card just to get a one-time discount is usually a bad idea. Chances are you won't use the card that often and there's no long-term benefit. Plus, if you open the account impulsively at the counter when you're checking out, you're definitely not looking at the fine print.
6. Do a little online comparison-shopping—Once you have an idea of the type of card that suits your needs, comparison shop. There are a number of websites that help you compare credit card offers and details. Creditcard.com or nerdwallet.com could be a good place to start.
7. Consider your own financial goals—How you use credit should be part of your overall financial plan. While things like mortgages and student loans can actually work in your favor because they're generally low cost and used for a greater purpose, consumer debt can derail you if you're not careful. No matter how many cards you have, make a commitment to charge only what you can pay off each month. And remember, that while one industry rule of thumb states that your overall debt should never exceed 36% of your gross income and consumer debt should be less than 20% of your net income, the best rule for how much credit card debt you should regularly carry is 0%.
Finally, it's a good idea to check your credit report before you apply for any new cards. You can check your credit report from the major rating agencies (TransUnion/Equifax/Experian) for free every 12 months at annualcreditreport.com.
Having a higher score can be helpful in getting a better deal. Then once you have the right cards for you, you can just ignore all those other offers!
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