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10 common credit card traps and how to avoid them

Make sure you know your card's terms and conditions and read the fine print.

Updated

Credit cards can be a useful financial tool if used properly. However, there are a number of pitfalls to watch out for. Aside from interest rates and annual fees, here are some of the credit card traps you should guard against when you’re paying with plastic.

  1. Highest interest is repaid first
    The bank is required to allocate your payment toward the debt that’s collecting the highest interest rate first. This is designed to help you avoid high interest costs, but sometimes it may work against you.For example, if you’re paying off a debt with a 0% balance transfer offer, but also use the card to make a purchase, your repayments will go to paying off your purchases instead of paying off your balance transfer. Make sure you know exactly where your payments go so you’re not wasting the 0% period.
  2. Minimum repayments
    Each month, you are required to pay a minimum repayment which can vary from 1% to 3% of your total balance. This will help you avoid late payment fees, but it won’t help you pay off your debt faster. That’s because although you’ve paid off 3% of your balance, 97% of your balance remains and it accrues interest.If you can’t pay your balance off in full by the statement due date, you should at least pay as much as you can each month. This will help reduce your overall interest costs and can help you avoid unmanageable debt. Another alternative is to make a balance transfer with a 0% intro APR period credit card.
  3. Late payment fees
    If you fail to pay at least the minimum repayment, you’ll be charged a late payment fee. Not only can this cost add up, but late payments will also leave negative marks on your credit. This can then decrease your credit score and make it harder to apply for other loans in the future.You can use Finder’s guide to credit card late payment and overlimit fees to see how much you could be charged if you can’t pay your credit card bill on time.
  4. Balance transfer fees
    If you’re struggling to pay off an existing debt, you can use a balance transfer to move your debt to a card with 0% interest for a promotional period. This can help you save on interest costs and pay off your debt faster. Although you’ll pay no interest for the promotional period, most of these cards come with a balance transfer fee.This fee is charged when you first move the balance and is usually either 3% or 5% of the total balance. So if you had a $7,000 debt with a 3% balance transfer fee, that would cost you $210. If you’re also paying an annual fee, this can really eat into your overall savings. Look for balance transfer cards that waive this fee for maximum savings.
  5. Cash advance fees
    Using your card to make a cash advance, such as an ATM withdrawal or a gambling transaction, can be expensive. This is because cash advances collect high interest rates which usually range between 22% and 28%. Unlike purchases, cash advances start collecting interest immediately. Also, most cards also charge a 3% to 5% fee for using your card for cash advances with a minimum of $5 or $15.You can avoid this by using your debit card for ATM withdrawals or a credit card issued by a credit union. The latter often comes with a waived cash advance fee.
  6. Foreign transaction fees
    If you’re using your card to make a purchase overseas, you may be charged a foreign transaction fee between 1% and 3%. Not only is this charged when you spend overseas, but also when you’re shopping online with an international retailer.If you’re planning an international trip, travel a lot for work or regularly shop online with international retailers, it could be worth considering a card with 0% foreign transaction fees to cut back on this cost.

Credit card traps

  1. Reward programs
    Credit cards linked with a reward program entice cardholders to spend to earn points which you can redeem for free flights or cash back. This is a great way to reward your plastic spending if you repay your balance in full each month.However, these cards usually come with higher interest rates. If you often carry a balance from month to month, the interest you’ll collect can easily outweigh the rewards you earn. If this is the case, you’re better off considering a card with a low purchase interest rate.
  2. Promotional offers
    Whether it’s thousands of bonus points or 0% on purchases or balance transfers, many banks offer new cardholders promotional offers to entice sign-ups. Although these can be a great way to get extra value from your new card, these introductory offers usually come with a catch.If you’re comparing such cards, you’ll notice you usually have to meet a spend requirement to get the bonus points. For example, a card may offer 50,000 bonus points but you’ll have to spend $3,000 in the first three months to get them. If this amount aligns with your credit card budget, it’s an easy way to boost your balance. If you’re unable to pay off the balance by the end of the statement period, however, the interest costs might outweigh the value of the points.
  3. Revert rates
    All credit cards that come with a 0% intro APR on purchases and/or balance transfers offer this perk for a limited time. Whether it be six or 21 months, once the intro period expires, your rate reverts to the standard APR which can range from 9% to 28%.To avoid these rates, set up a budget plan and determine how much you’ll need to pay each month to clear your debt before the 0% promotional period ends. For example, let’s say you have a card with 0% on purchases for 12 months and you’re planning to spend $5,000. You’d need to spend around $417 each month to pay off this debt before the standard purchase rate applied to your debt.
  4. Staying with one card for years at a time
    Although it may appear more convenient, you could miss out on competitive new offers if you hold on to only one credit card for too long. Instead, once you’ve paid off your credit card debt or used the card for a year or so, you may want to start comparing other offers.You can compare offers based on your needs. So if you’re struggling to pay off your debt because of high interest, you might want to move your balance to a card with 0% on balance transfers. If you’re only using your card for emergencies and always pay your balance in full, you could consider a card with $0 annual fee. Or if you have some big ticket purchases to make, you could consider a card with a low or 0% interest rate.

    Keep in mind, you don’t have to close your old credit card, especially if it has no annual fee. Closing an old account may negatively impact your credit score. Also, try to apply for one credit card at a time and avoid having too many hard inquiries on your credit.

Compare credit cards

Name Product Filter values Rewards Purchase APR Annual fee
Citi® Double Cash Card
Up to 2% cash back on purchases (1% when you buy plus 1% as you pay)
13.99% to 23.99% variable
$0
This one of the most valuable flat cashback cards. It comes with 2% cash back (1% when you buy plus 1% when you pay) and 18 months months to pay off transfers.
CardMatch™ from creditcards.com
See terms
See issuer's website
See terms
Use the CardMatch tool to find cards you're likely to qualify for with your credit score, without a hard pull on your credit.
Citi® Diamond Preferred® Card
N/A
0% intro for the first 12 months (then 13.74% to 23.74% variable)
$0
A market-leading balance transfer intro APR of 21 months and 12 months on purchases. Plus Citi Entertainment℠ for deals on dining and going out.
Citi Rewards+℠ Card
Earn 2x points at supermarkets and gas stations on up to $6,000 annually, then 1x points after that and on all other purchases
0% intro for the first 15 months (then 13.49% to 23.49% variable)
$0
Get rewards on gas and groceries with no annual fee. Ideal for everyday use, it's the only card that rounds purchases up to the nearest 10 points.
TD Cash Credit Card
3% on dining, 2% at grocery stores and 1% on all other eligible purchases
0% intro for the first 15 billing cycles (then 12.99%, 17.99% or 22.99% variable)
$0
3% on dining and 2% on groceries make this a valuable card for food purchases. Use it while traveling, too, with no foreign transaction fees. Available in: CT, DC, DE, FL, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT
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Compare up to 4 providers

Bottom line

These are just some of the credit card traps you should avoid. Doing your research when comparing cards, creating and sticking to a budget and regularly looking for more competitive offers can help you keep your plastic in check.

Pictures: Getty Images

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