NEW YORK (MainStreet) — Fancy credit card rewards programs and new checking account fees may be enticing consumers to ditch their debit cards, but not everyone should be breaking their old credit cards out of retirement. MainStreet takes a look at some key questions consumers should ask themselves before making a credit card their payment option of choice.
Will I pay the bill off on time?
The fact that credit card issuers are starting to lend to subprime borrowers again is problematic since a low credit score indicates the applicant most likely had some problems paying off bills in the past. Those with a history of debt problems or self-proclaimed shopaholics should probably refrain from unfreezing their credit cards since the perks associated with their use can only be reaped if the bill is paid off in time. Rewards points, for instance, won’t stack up to what you can pay in penalty interest rates and your future creditworthiness won’t actually come to fruition if your credit score drops 100 points after a first missed payment.
Can my credit score take a hit?
Adding another credit card to your arsenal can ultimately help you build credit, if used wisely. However, it can also cause your credit to take a ding in the short term. This is largely thanks to the inquiry generated once you apply for a new card and the change in your credit-to-debt ratio. Running up a large bill on a new or existing credit card by moving all of your day-to-day expenses to the card can negatively impact your credit-to-debt ratio, so those who know they are going to be shopping around for a house or applying for an auto loan should probably refrain from switching over to a credit-heavy diet while waiting for their applications to be approved.
Will I use the rewards?
Rewards programs are meant to incentivize credit card use, but they are only beneficial if a cardholder actually redeems the points they earn. Many high-end rewards cards, for instance, carry inordinate annual fees that the average consumer, unless they travel often, isn’t likely to recoup in points over the course of the year.
As such, consumers shouldn’t be swayed into increasing their credit-card use by rewards alone. And, if they do find themselves hypnotized by words like “cash back,” “sign on bonus” or “frequent-flier miles,” they should carefully review the terms and conditions associated with the card to make sure there are no spending limits, thresholds or rewards caps they need to know about.
Want a credit card with great rewards but no annual fee? You can find some of the best options in this MainStreet article.