A Closer Look at Credit Cards

Myth: Paying an Annual Fee Is a Waste of Money

Fact: Actually, the card can be worth the price. Before you sign up for one, do some calculations to see if the benefits you receive pay for or exceed the yearly charge. There are numerous cards (often ones with travel-related rewards) that may meet this criterion. For example, Delta’s Gold SkyMiles American Express card ($95 annual fee, waived the first year) lets cardholders check one bag for free on every flight, for a savings of $50 round-trip. And the fee waiver is extended to nine people on the same reservation, so a family of four could save up to $200 with one round-trip.

Myth: There’s No Harm in Signing Up for Store Cards

Fact: Retailers entice customers to open credit-card accounts by offering promotions, discounts, rewards programs, 0 percent financing, and other perks in addition to saving (typically 10 to 15 percent) on purchases made the day you open the account. Some of these store cards can be worth having, but don’t sign up for every card you’re offered—that will put you at risk of racking up debt. “If you want retail credit cards, get them from the one or two stores that you frequent the most, since you probably won’t use them regularly and may lose track of when the bills are due,” says Bill Harde-kopf, the chief executive of LowCards.com, a credit-card-comparison site.

This rule of thumb especially holds true if you’re in the market for a loan. Why? Each application for a new credit card triggers an inquiry on your credit report; opening several accounts in a short time makes you look like a risky borrower and could reduce your credit score by up to 30 points, says Hardekopf. As a result, you might qualify only for a loan with unfavorable terms.

Another scenario in which you should never have store cards: You tend to carry a revolving balance. Issuers typically charge interest rates that exceed 20 percent (compared with an average of 14 percent and up for regular cards).