When is Getting a Credit Card a Good Idea?
A recent decision by the Consumer Financial Protection Bureau has many consumers asking an important question: is getting a credit card a good idea? Before you fill out an application, learn how new rules may affect the value of revolving accounts.
Why They Are Important
A credit card is a good idea for anyone seeking to establish credit and/or safeguard against emergencies. These days, revolving accounts can also offer cardholders big rewards in the form of cash-back, gas rebates and discounts on travel and certain brands of products. That said, the value of each individual offer is wholly dependent on interest charges and annual/upfront fees. Recently, the CFPB relented on its plans to prevent providers from charging high upfront fees; and consumers are likely to face escalating costs going forward.
Why Fees May Be Going Up
Currently, banks are not allowed to charge fees totaling more than one-quarter of a cardholder’s limit during the first year of a revolving account’s existence; however, there is no limit to what they are allowed to charge before the applicant activates the account.
The CFPB recently announced it would abandon a charge to limit the upfront fees providers are able to charge cardholders after the bureau lost a federal court case in South Dakota. Since its inception, the young agency has faced all sorts of resistance from corporate lobbyists and conservative politicians who argue that its policies might hamper the struggling economy. To the chagrin of many consumer advocates, the powerful opposition proved successful in stymieing the CFPB’s attempts to limit upfront fees, which provide big profits to banks, while eating up a substantial portion of cardholders’ available credit.
Is Getting a Credit Card a Good Idea?
The CFPB’s decision to allow providers to charge whatever they want pre-activation is likely to cost cardholders with poor credit the most. Often, these fees can amount to as much as $100. This can put a big dent in a cardholder’s available balance, especially if they have dings to their credit which tend to result in lower spending limits.
That said, consumers can still get great value out of their credit cards if they zero out their balances at the end of every month. By doing this, they can avoid interest fees, while improving their credit reports. Additionally, consumers have the ability to offset some or all upfront fees by utilizing reward cards that offer cash-back and discounts on everyday purchases. To get the most value, it may be wise to accept higher upfront fees in exchange for low interest rate credit cards and/or those that offer incentives.