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Aside from a potential annual fee, credit cards don't inherently have to cost you anything. If you pay your bill in full each month, you can use a credit card—and get all the rewards and benefits—without paying any interest or fees. But there are also many potential costs, and you'll want to consider these before applying.
Costs to Consider Before Getting a Credit Card
Whether you're applying for your first credit card or considering adding a new card to your wallet, there are three main costs to consider.
Annual Fees
The first is the annual fee. It's the only cost you can't avoid—unless you choose a card with no annual fee. You'll generally have to pay this fee when you open the card (some cards waive the fee the first year) and again every 12 months.
Although you can close the card in the future to avoid the fee, you might lose your rewards unless you transfer them first or they're part of a partner loyalty program, such as an airline or hotel rewards program. Also, some card issuers might retroactively take back rewards—such as an intro bonus—if you close your account within 12 months of opening it.
Interest Charges
Credit cards may have up to three different interest rates—the card's annual percentage rates (APRs)—for purchases, balance transfers and cash advances.
You can avoid interest charges on purchases by paying your bill in full each month. If you pay less and carry a balance, you'll have to pay interest on the amount you don't pay off. Additionally, you might accrue interest on new purchases from the day you make the purchase.
Balance transfers and cash advances generally start to accrue daily interest right away. Cash advances may also have a higher interest rate than purchases or balance transfers, which tend to have the same rate.
Some cards offer promotions that give you a temporary lower or intro 0% interest rate on purchases and/or balance transfers. These promotional rates can help you save money if you're carrying a balance, but only during the limited promotional period. Also, if the card only has an intro 0% offer on balance transfers, review the terms to see if the card issuer will charge you daily interest on new purchases.
Usage-Based Fees
Credit cards may also charge various fees based on how and where you use your credit card, such as:
- Late payment fees: A fee you'll have to pay each time your monthly payment is late.
- Cash advance fees: A fee that's added to your balance when you use your card for a cash advance. Beware that card issuers might consider cash-like purchases, such as prepaid cards or wire transfers, to be cash advances.
- Balance transfer fees: A fee that you'll pay each time you transfer a balance to your credit card. The fee often ranges from 3% to 5% of the amount you transfer.
- Foreign exchange fees: An additional fee that you pay when you use your credit card while you're abroad or if you make online purchases in a foreign currency. If you plan to use your card this way, look for a credit card that doesn't have a foreign transaction fee.
Some credit cards also charge other types of fees, such as a fee to get an additional card for an authorized user. Review the terms and conditions before you apply to make sure you understand all the potential costs.
How a Credit Card Can Affect Your Budget
A new credit card can affect your budget in different ways, and it may take some time to adjust if this is your first credit card and you're used to paying with cash or a debit card. In addition to needing to budget for potential fees, some of the adverse effects could be:
- You can easily overspend. Your credit card isn't tied to your bank account, like a debit card, and you can spend up to your credit limit regardless of how much money you currently have. Although you only need to make minimum payments to avoid late payment penalties, overspending can lead to carrying a balance and accruing interest.
- Interest can eat into your budget. Once you start carrying a balance, it can be hard to pay off the card completely, especially if you keep using the card while interest accrues daily. You'll then have to budget for the added interest, which gives you less money to spend on other wants and needs.
- You might start using next month's income for this month's expenses. Credit card bills are generally due about three weeks after the end of each billing cycle. For example, all your purchases from January might be due around February 21. If you don't put money aside for that bill until you're paid in February, you might be overspending without realizing it—even if you pay the bill in full each month. Using a zero-based budget and setting aside money as you use your card could help you avoid this trap.
Although a credit card might wind up costing you money and could make budgeting a little more complicated, there are also potential benefits to consider:
- You can add the rewards to your budget. Whether you're earning cash back or getting points that you use to book travel, you can earn rewards on purchases that you were going to make anyway. You can then redeem them when there's a good opportunity or your budget is tight.
- You can get interest-free financing. If you're paying your credit card bill in full, you won't accrue interest on purchases throughout the billing cycle or the approximately three-week grace period that follows. Although regularly making big purchases that you can't afford at this moment can be risky, sometimes a strategic purchase makes sense. For example, if there's a big sale—perhaps an item you're saving up for or a discount on gift cards you'll use later—you might be able to time the purchase and get around 52 days of interest-free financing.
- You have some extra flexibility. Although no one likes paying interest, sometimes accruing interest is better than missing bills altogether. Having a credit card that you can use during setbacks or an emergency can give your budget a little extra breathing room.
How to Manage a Credit Card Responsibly
There are a few key things you can do if you want to use your credit card responsibly and keep it from hurting your budget.
- Treat your credit card like a debit card. In other words, only use it to make purchases when you already have the money in your account. You can even make early payments on your card throughout the month.
- Set up autopay. Automatic credit card payments, even if it's only for the minimum amount, can help you avoid late payment fees. Once payments are 30 days late, the late payment can also be reported to the credit bureaus and hurt your credit score.
- Don't max out your card. Only using a small portion of your card's credit limit can be best for your credit score, and it could make paying off the bill in full easier.
- Enable notifications. You might be able to turn on email, text and app notifications to track your balance, alert you when a bill is due or tell you when there's a large purchase. These alerts can help you stay on top of your account and detect fraudulent transactions.
If you have to use a credit card to borrow money, you can also research different strategies for paying off credit card debt.
Find Your Next Credit Card
If you think your budget is ready for a new credit card, the next step is figuring out which credit card to get. There are lots of options. You don't have to choose a card from your bank, and you should compare cards' benefits, features and fees. Try Experian's free comparison tool to get matched with card offers based on your credit profile and review the results to find the best fit.