Credit cards aren't as detrimental to your financial health as some financial gurus make them out to be. In fact, they could benefit you in a number of ways and put more money in your pocket if used responsibly. On the other hand, skimming the fine print and going with the first credit card offer that comes your way could cost you wads of cash and your sanity if the mountain of debt becomes too enormous to handle.
Here are some truths you want to be aware of before saying yes to the next credit card solicitation you receive:
1. Applying For A Credit Card Will Hurt Your Credit Score
When you apply for a credit card, your FICO score will take a hit due to the hard inquiry. But with responsible debt management in the subsequent months, your credit score should bounce back in no time. However, frequently applying for new credit cards will have a greater negative impact on your credit score and communicate to creditors that you're strapped for cash. And the impact could be more significant if you have a limited credit history or minimal information in your credit file.
2. Paying Off Your Credit Card Bill In Full Each Month Will Help Your Credit Score.
It is not necessary to carry a balance each month to increase your credit score. Simply using the card for small purchases and paying the bill before the grade period ends will help you build responsible payment history, which accounts 35 percent of your FICO score, and demonstrate to potential creditors you can handle debt responsibly. Plus, you'll avoid paying interest on your purchases.
3. Missing A Payment Can Wreck Your Credit
If you miss or only pay a portion of your minimum credit card payment, you may incur a late fee and a penalty APR may also apply. And if the account remains past due for 30 days or, the delinquency may be reported to the credit bureaus, which can tank your FICO score.
4. Credit Cards Have Built-In Fraud Protection
If you are disciplined enough to pay off your credit card balance each month, consider using it for a bulk of your purchases. Reasoning: the fraud protections they are offered are unrivaled. Under the Fair Credit Billing Act, you are limited to a $50 liability for unauthorized or fraudulent transactions on your credit card. By contrast, the liability for debit cards are as follows:
- $0 if the lost or stolen card is reported
- $50 if you report the card as lost or stolen within two business days
- $500 if you report the card as lost or stolen card between 3 and 60 calendar days
- the entire amount after more than 60 calendar days
You must also consider the financial strain that results when the debit card issuer is conducting their investigation and deciding if your cash will be refunded. (By law, they have 10 days to investigate).
5. Credit Cards Offer A Host Of Other Benefits
Beyond zero-liability fraud protection, most major branded credit cards offer several purchase protection and travel benefits, including:
- Price protection (within 60 days)
- Extended warranties
- Roadside assistance
- Rental car collision and damage waiver insurance
- Lost or damaged luggage insurance
Check with your card issuer to learn about any perks that may be available to you.
6. An Enticing Introductory Offer Doesn't Always Equate To A Good Credit Card
You discover a credit card that's offering no interest for 12 months and a free flight when you spend $500 within in the first three months. Sounds enticing, but if the card has an excessive annual fee and APR once the promotional period ends, the costs will easily outweigh the benefits.Have an offer that seems too good to be true? Calculate the reward for yourself!
7. Not All Credit Cards Have A Grace Period
The standard grace period ranges between 20 and 30 days on most credit card products. However, there are credit cards that tack on interest from the moment you swipe your card. This is common amongst credit cards that cater to consumers with subpar credit. If you fit into this category, a secured credit card from a reputable financial institution may be a better option.
8. Idle Credit Cards Can Cost You
There's nothing wrong with using cash in lieu of credit cards for purchases. But you want to confirm none of your cards have dormancy fees before you let them sit idle and rack up unnecessary fees.
9. A Credit Card Limit Increase Can Help Your Credit Score
If you can responsibly manage your credit card debt (or eliminate the balance each month), it is to your advantage to accept a credit limit increase. Reasoning: accounts owed make up 30 percent of your FICO score, and the lower your debt to available credit ratio, the higher your score. For example, if you have two credit cards, each with a $500 limit and $150 outstanding balance, your debt to available credit ratio is 30 percent. But if you receive a credit limit increase of $600 on one of the cards, bringing your total credit limit to $1,600, your new debt to available credit ratio will be 18.75 percent.
10. If You Only Pay The Minimum Each Month, You'll Spend Years Getting Out Of The Hole
The minimum monthly payment is often perceived as a gift to the uneducated consumer. They view it as an opportunity to enjoy all the little luxuries they can't actually afford at a fraction of the cost as long as they continue to make timely payments. But once the card is maxed out, reality sets in: interest has been accruing the entire time at an astronomical rate, and now they're left with a massive balance. To illustrate, if you have a credit card with a $750 balance and 24.99 percent APR, it will take you 48 months and cost $1,189.26 to eradicate the outstanding balance. That's a whopping $439.26 in interest, alone!
11. Foreign-Transaction Fees Add Up Quickly
Do you frequently travel abroad? If so, check the terms and conditions to confirm that foreign-transaction fees are not applicable. Otherwise, expect to pay an additional 3 percent on each purchase. This may not seem like much, but if you spend $3,000, that's $90 in fees.
12. Fixed APR’s Can Change
The Credit CARD Act of 2009 mandates that APR increases be communicated, in writing, to cardholders. But don't think that you are exempt from an increase for the duration of your time as a cardholder simply because the terms and conditions indicate the APR is fixed.
13. Not All APR’s Are Created Equal
Interest on purchases are a given, but higher APRs sometimes apply for late payments, cash advances and balance transfers. And don't be surprised if you also have to pay a flat fee for any of these items.
Get your quick guide to understanding your APR's here.
14. You May Incur A Fee If You Go Over-The-Limit
You transaction may not have been declined at the point of sale although you were over the limit, but that doesn't mean it's OK to keep swiping. In fact, chances are you'll be assessed a penalty for doing so.
15. Closing A Credit Card Account Could Hurt Your Score
If overspending is a problem, it may be in your best interest to let the card go. But remember that closing a card won't make the debt go away. Also, be mindful of your debt to available credit ratio since eliminating a large chunk of available credit can wreck your score.
Bottom line: Credit cards are powerless until you put them to use. Therefore, you should grasp an understanding of how they work and carefully explore your options to derive the greatest benefit.