Credit cards come with concerns

AUSTIN (KXAN) - With holidays coming up, its always tempting to consider using a credit card, or opening a new credit card, so that purchasing gifts is less of an immediate financial burden. 

However, there are a lot of risks in opening a credit card, and the Better Business Bureau of Austin reminds consumers of what to ask before opening a new account.

"Whenever you are applying for any kind of credit card, the first thing is take your time," said Erin Dufner of the Austin Better Business Bureau.  

 

Dufner said it's important to ask a few questions before a buyer starts filling out the application.

• Are you currently in debt; if so, how much do you owe? Does it make sense to take on even more debt? Should you focus instead on paying down your current obligations and establishing a savings account to cover emergency expenses? 
• Why do you need a credit card? Is it just for emergencies? Are you getting a card for unwise reasons - i.e., to take cash advances to pay off existing credit card debt? 
• Do you have too many credit cards? This is a personal decision, but you should keep in mind that the credit limits on your various credit cards do impact your credit score, as does the total of your outstanding balances. Credit reporting agencies consider the percent of your available credit that you are using when determining your creditworthiness. Are you maxed out or near your credit limits? 

"It's really important for consumers to step back and think about, do they really need that credit card," Dufner explained. "Sometimes, if they need a little extra cash, certainly contacting their financial institution directly can be a great way just to get that little extra cash to get you through the holidays."  

Dufner said that home equity loans or personal loans can be more effective than getting a new card for consumers with equity.

For those who decide getting a credit card is the right choice, they should take time to look over the terms of the credit agreement.

"Make sure you understand if they are promising a specific interest rate, what time frame will that interest rate actually have," Dufner said. "Is it a short term, is it a long term, are there any annual fees?"

"Sometimes, there's no annual fee for the first year, but there may be a very high annual fee the next year," Dufner warned. "The biggest thing folks need to look for is that interest rate, what that long-term interest rate's going to be."

Dufner said consumers should also ask questions about their spending practices and preferences. 

•  How will you use the card? If you plan to use the card for purchases on a frequent basis, the purchase APR is important. If cash advances are your priority, seek a card with cash advance fees and a cash advance APR that you can afford. 
• Is the credit limit too high, too low or just right? Be honest. If a super low credit limit is not going to meet your needs, be aware that you'll likely end up paying over-the-limit fees. If the credit limit is too high, will you be able to resist the temptation to keep charging until you hit that ceiling? 
• Do you plan to carry a balance? If you always pay your monthly bill in full, it might make sense to get a card that has no annual fee and a generous grace period. If you intend to carry a balance from month to month, note the APR for purchases.  
•  What perks are you likely to use? Enhancements can include cash rebates, purchase protections or warranty guarantees, travel accident or car rental insurance, product discounts and usage incentives (like frequent flyer miles). If you don't plan to utilize the perks, it may be harder to justify the higher interest rate or annual fee. 

All credit card solicitations and applications must include certain key details in a disclosure box. It is vital that people understand the terms and conditions they are agreeing to as a cardholder. 

 

First is the annual percentage rate for purchases. Is the interest rate fixed or variable? Look for details on Other APRs (for cash advances, balance transfers or penalty rates). Some cards have tiered APRs in which different rates are applied to different levels of the outstanding balance. A penalty APR is applied by some card issuers if you are late in making payments on that card or any other card.

 

"Any late payment to a credit card can result in, number one, higher interest rates," Dufner explained. "And number two, significant late fees that are going to be revolving in that balance, making your end purchase sometimes two or three times what the original purchase was, with late fees, with additional accrued interest."

 

Also the BBB said it's important to consider the annual fee and grace period. Look at the finance charge calculation method and check to see if there is a minimum finance charge.

 

Finally, review the fees. Watch out for transaction fees for cash advances, balance-transfer fees and any penalty fees - like late payment charges, return-check fees, over-the-credit-limit fees.

 

It's