When used responsibly, some credit cards can let you earn rewards, and some can give you more financial flexibility. The more you know about how credit cards work, the more you can utilize their benefits.
Here are some tips that will help you learn 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. High credit utilization and falling behind on payments can damage your credit history and harm your credit score.
Credit card fact 4: Opening a new card can affect your credit score
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 decide 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 up to 2 years and affect your credit score for up to 1 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-qualifications for your benefit
Credit card pre-qualifications can give you a general picture of what kind of cards you may be able to obtain.
Pre-qualifications can sometimes help you understand what type of cards you might be approved for if you apply. However, being pre-qualified 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.
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.
Credit card fact 9: Most negative information can stay on your credit report for up to 7 years
Most negative information remains on credit reports for up to 7 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 2 years. Larger issues, such as bankruptcies, can last up to 10 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 pull your credit report.
New creditors want to see your payment history, credit utilization, length of credit history, credit mix and other new credit you’ve applied for. 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 7 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. 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. You can eliminate residual interest by paying off your 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.
