When used responsibly, some credit cards can earn you rewards, and some can give you more financial flexibility. But do you know everything about credit cards?
Here are some tips that will help you learn about how credit cards work and how you can maximize their benefits.
Credit card fact 1: There are different types of credit scores
There are different credit card scoring models and they all calculate credit scores slightly differently.
The main difference is what variables they prioritize in calculating your score. Some, for example, weigh credit utilization higher, while others weigh a positive payment history more.
Credit card fact 2: Your credit card interest rates can change
Most credit cards come with a variable APR. Economic conditions can affect a credit card's variable APR, which is tied to an index rate (usually the prime rate).
The interest rate can also change depending on certain conditions. For example, your interest rate can change if you miss payments or at the end of a promotional introductory period.
Credit card fact 3: Having multiple credit cards isn't always a good thing
While many people don't want to have a thin credit file, having multiple credit cards can raise the risk of damaging your credit score if you're unable to pay the balances.
If you don't pay your credit card balance off fully each month, your monthly balance could become unmanageable over time. Falling behind on payments can damage your credit history and harm your credit score.
Credit card fact 4: Your credit score may be affected by a new card
A hard inquiry occurs when you apply for a new credit card. This means the issuer checks your credit file to determine your creditworthiness as a borrower and decides whether to approve you.
Hard inquiries can negatively impact your credit score, so your credit score may dip by a few points after you apply. Hard inquiries typically stay on your credit report for two years and affect your credit score for up to one year.
Credit card fact 5: Credit card accounts don't really have an expiration date
While a credit card can expire, credit card accounts usually don't.
Credit card companies typically send you a replacement card before your current card expires to keep your account active. And credit card debt, of course, has no expiration date, even if your account is closed.
Credit card fact 6: You can use credit card pre-approvals for your benefit
Credit card pre-approvals can give you a general picture of what kind of cards you may be able to obtain.
Pre-approvals can sometimes help you understand what type of cards you might be approved for if you apply. However, being pre-approved doesn’t guarantee a card issuer will approve you for a card when you apply.
Credit card fact 7: A High credit limit can be a plus
A high credit card limit can be beneficial to your credit score if you use it responsibly.
Your credit utilization ratio takes your current credit card debt and divides it by your available credit limit. A 30% ratio or lower is often recommended by financial advisors.
Higher credit limits may improve your credit utilization ratio, which may in turn improve your credit score. Keep in mind, though, that savvy credit users will refrain from using a large portion of their credit limit.
Credit card fact 8: Paying less than the minimum may be considered a missed payment
Typically, if you pay less than the monthly minimum payment on your balance, your payment may be considered missing, and penalty fees may be applied.
Savvy credit users often aim to pay more than the minimum payment: doing so will reduce your debt which can lessen interest charges and improve your credit utilization ratio.
Credit card fact 9: Most negative information remains on credit reports for up to seven years
Most negative information remains on credit reports for up to seven years, and can affect your credit score. However, not all types of information stay on your credit report for the same amount of time. Minor dents, such as hard credit inquiries, may only last two years. Larger issues, such as bankruptcies, can last up to ten years.
Credit card fact 10: Credit reports may be scrutinized by potential lenders
When you're applying for a credit card, the lender will usually examine your credit report.
New creditors want to see your payment history. When your credit report consistently shows responsible credit use, your chances of being approved for a new line of credit are better.
Late payments, one of the more significant factors in determining a credit score, will remain on your credit report for up to seven years - so it's important to work on maintaining on-time payments.
Credit card fact 11: Credit cards can charge residual interest
If you carry a balance from month to month, you might be charged residual interest. Also sometimes referred to as trailing interest, residual interest is charged from the time your credit card statement is issued until your payment posts. Since these interest charges apply after the billing period ends, they won't show on your current credit card statement and the charges can accrue even if you paid the full balance on that statement. Residual interest charges will instead show up on your next credit card statement.
Savvy credit card users can eliminate residual interest by paying off their credit card balance completely each month.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
