Looking to Apply for a Credit Card? Read the Terms Carefully

When you apply for a credit card, it’s important not to get swayed by the marketing campaigns of the issuers. That brand-new look of the credit card may look flashy, but that doesn’t necessarily mean it’s the right card for you.

When you look to apply for a credit card, always choose one that matches your spending patterns, your lifestyle habits, and your budget. If you want to apply for a credit card where you will carry a balance, it doesn’t make sense to apply for a rewards credit card with a high APR. The rewards may be great, but if you carry a balance forward from month to month, the credit card interest will quickly undermine the rewards benefits.

Similarly, it’s tempting to apply for a credit card deal with a 0% APR offer on purchases and balance transfers for the first six or twelve months. However read all the terms and conditions before you apply, so you know what happens when the 0% APR expires.

For example, the marketing material may say that the permanent APR is as low as 10.99%. But that phrase indicates that the lowest APR is only given to people with a good credit rating. If your credit rating is less than superb, you will be paying a higher APR, upwards of 14.99 or even 19.99% when the 0% APR expires.

When people apply for a credit card, they rarely realize just how expensive it is to carry a balance at high APRs. It is easy to treat the new credit line you get as extra cash on hand. However, once the 0% APR expires, the purchases you made all of a sudden become very expensive, especially if you can only afford to pay the minimum monthly payment every month.

Let’s take the example of one family, the Smiths. In order to purchase a new sofa for their living room, they apply for a 0% credit card with 0% on purchases for up to 12 months. The credit card application gets approved, but because their credit is only good, and not excellent, the 0% APR on purchases only lasts for 6 months. And even though the credit card application said that the APR would be as low as 7.49% at the end of the 0% APR offer, they instead are given a higher APR, say 12.99%.

The Smiths pick out a great sofa, and since there’s still credit left, they buy a few other things. Before they know it, they have $4,500 in charges on the new credit card. And, because their budget is tight, they can only afford to pay the minimum monthly payment.

How long will it take the Smiths to pay off the sofa? Because of the high interest on the credit card, if they pay only the minimum monthly payment, it will take 327 months to pay off those charges. That’s more than 25 years! In that time, they will have paid $7,319.89 in interest. This means that the original $4,500 in purchases will cost the Smiths $11,819.89!

In short, when you apply for a credit card, educate yourself about the details of each offer before you apply, especially the permanent APR. Be sure not to make any large charges unless you can get a low interest credit card or can afford to pay off the charges fast.

Want to know how long it will take to pay off your current credit cards? Use this convenient credit card calculator from Bankrate.com.

Published: May 22, 2009