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 benefit from using them.
Credit Card Fact 1: There are different types of credit scores
There are multiple types of credit scores.
The main difference between these credit scores is what variables they prioritize in calculating your score. Some, for example, weigh credit utilization higher, and others favor a positive payment history more.
Credit score types have different models to provide credit information for different kinds of financing, like home mortgages, auto loans, or credit card applications.
Credit Card Fact 2: Your credit card interest rates can change
The interest rates on credit cards can vary depending on certain conditions, such as a failure to pay back a balance or the ending of an introductory period on an interest rate.
Economic conditions can also affect a credit card's variable APR, which is tied to an index rate, often the prime rate. A variable APR can change over time, making interest rates less predictable on your credit card.
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 don't pay your credit card balance off fully each month, your monthly balance could become unmanageable over time due to compound interest. Demonstrating a diverse mix of credit accounts is good for your credit history but falling behind on credit card payments can damage that history and have a negative impact on 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 calculate what interest rates to charge you.
Any hard inquiries could negatively impact your credit score, so you can expect a bit of a dip in your credit score as creditors perform them during the application process.
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.
If your credit card expires and your account remains in good standing, credit card companies typically will send you a replacement card before the 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. Not only that, but the cards you're receiving preapproval for might not even be offering you the best deal. It could just be a convenient one.
While credit card pre-approvals can sometimes help you understand what type of cards you might be approved for if you apply, keep in mind that this doesn't mean a card issuer will always accept your application for a card for which you've been preapproved.
Credit Card Fact 7: High credit card 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 is considered a missed payment
If you ever pay less than the monthly minimum payment on your credit card balance, your payment will be considered missing, and penalty fees may be applied.
Even though you've paid some amount towards your balance, it still will not count as a minimum payment, and you've failed to meet your card's repayment terms.
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 all at once.
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 this information can be used in determining your credit score. However, not all types of the information stay on your credit report for the same amount of time. Minor dents, such as 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 history of repaying your credit and loan debts: when your credit report consistently shows a responsible credit history, your chances of approval for a new line of credit are greater.
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 don't pay off your credit card balance in full each month and instead carry a balance from month to month, you might be charged residual interest. Also sometimes referred to as trailing interest, residual interest is the interest 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. The interest charges would 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. This way, they can avoid being charged interest as a result of carrying balances from one month to the next.
