Don't let new card's annual fee take you by surprise


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I recently applied for a Credit One card and was approved for a limit of $300. I didn't know that the $75 annual fee was taken off the top and the true available limit is $225. I have not received the card yet, and I don't plan on using it because I was also approved for a Capital One card (Quicksilver) with better rates and a limit of $500.

If I close my Credit One account without activating the card, will I still be liable for a balance of $75? How will closing the card affect my score? I currently have a Capital One Platinum with a limit of $300, and I'm waiting to receive the Credit One ($300) and Quicksilver ($500). -- Katrina


Dear Katrina,
When you apply for a credit card and are approved, the account is technically open. Even if you have not yet received the card, activated it or made a charge -- the line of credit has been granted.

However, because the account is still so green, it's still in the credit reporting grey area. Certainly Credit One has notified TransUnion, Equifax, and Experian that you applied for the card, but it usually takes about a month after getting the card for it to appear on your files.

Therefore, if you really don't want this card, make haste. Call the company immediately and say you changed your mind because of the $75 fee, especially in relation to the paltry credit limit.  Paying substantial annual fees can be prudent when you get more out of them than what they cost (for example, some pricy travel cards cover the cost of checked baggage and provide access to expensive airport lounges). If you're not getting anything out of the deal, however, and don't need the card to build a credit history, what's the point?

Unfortunately, I can't guarantee that the company will release you from the fee they've already charged, since it depends on the way the agreement was written (which you did sign) as well as their policy. Do try, though. Sometimes all it takes is a polite, but firm, request.

As for your credit rating, closing the card now shouldn't have much, if any, impact. The inquiry into your credit by Credit One is already being calculated into your FICO scores, but "pursuit of new credit" is a minor scoring factor. And even if the account did show up for a month or two before cancellation, it's still so young that closing it will also have little impact. With no payments or charges, it will be just a blip.

In the meantime, you seem to be a Capital One customer with one card in action and another on the way. Great! Use them to create a fabulous credit history.

Be careful with any balance you carry over from month to month, since debt-to-credit limit is one of the top credit scoring factors (second only to paying on time). The credit limit for each account is tiny, so you will have to be especially committed to affordable charging. For scoring purposes, a good rule of thumb is to keep the running balance under 30 percent of the amount you can borrow. That means with a total credit limit of $800, you'd be topped out at $240 -- the price of a pair of running shoes and few restaurant dinners.

After paying in full (or close to it) and on time for about a year, reach out to Capital One to request a higher limit on either or both of the cards. More borrowing power will be particularly helpful if you do some traveling, as the cost of a single plane ticket can tap you out in one fell swoop. Consider what you may want to charge for the holidays or for your own personal needs, such as buying a new computer. The sum you can charge should be enough to help you pay for what you want, while also steering clear of the debt danger mark.

And, of course, in the future, read the terms and conditions for any loan or credit card carefully before signing. As they say, the devil is in the details.

See related: Closed accounts affect your credit score, but maybe not how you think, Your low-limit secured card strategy: Pay the bill early, often, Will closing a new, unused card hurt my score? 

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Published: July 15, 2015

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