Attention credit card holders. You rely on your plastic each and every day, whether you’re buying groceries or gas, shopping on Amazon, or cashing in on some travel rewards points. But no matter how you use your cards and how credit-savvy you might be, I bet there are a few finer points of your credit card that you don’t fully understand. Don’t believe me? Well keep reading and see if any of these “5 Things You Don’t Know about Your Credit Card” catch you by surprise.
#1 You Pay off Your Balance in Full, but Your Credit Score is Still Getting Dinged
If you are credit-savvy and good with personal finance, you know that credit card interest is one thing you want to avoid. At the end of the day, it’s interest that can lead to overwhelming debt, and it makes your purchases more expensive. So, conventional wisdom to avoid credit card interest goes something like this:
Pay off the balance at the end of the month, before any interest accrues.
That is certainly good advice but, believe it or not, it’s not thorough enough. Sure, this advice will keep you from accruing interest, but it won’t be optimal for your credit score. The reason for this is that in most cases the creditor reports your outstanding balance to the credit bureaus before they give you a final reminder to pay. In other words, if you pay at the end of the month, your balance has likely already been reported.
This will hurt your credit utilization, which is a component of the “Amounts Owed” portion of a FICO score, making up about 30% of the score formula.
To straighten this out and minimize your credit impact, you will want to call your creditor directly and ask them which day of the month they report your balance to the bureaus. Alternatively, look for the “statement closing date” on your statement (this is when your balance will be reported).
Then, set monthly reminders so that you can pay your balance in full before this date. If you put more charges on the account between that date and the close of the month, you will want to make a second payment to ensure that interest does not accrue.
#2 The Annual Fees are Negotiable
Credit card fees, particularly annual fees, are negotiable in many cases. Like with many forms of negotiation, sometimes all you have to do is ask. If you have a rewards card or something like an American Express that requires an annual membership fee, ask about getting that waived.
You may not be able to do this all the time, but every few years it’s worth the attempt. Remind the customer service representative of your cardholder loyalty and how much business you do with them. On the other hand, tell them about the great offers you’ve been receiving in the mail that look like they might be a better fit for you. These bargaining tactics might just get you a lower or waived fee arrangement.
#3 A Higher Credit Limit (and Credit Score) is Just a Phone Call Away
If you’ve been responsible with your credit and do a fair amount of spending on your card, getting a higher credit limit might be fairly easy. You should be able to call your creditor to make this request, or use an online form when you are logged into your account.
As a general rule, you can comfortably request to double your starting credit limit, and you can do so after six months of a good credit history (some companies allow this after just 60 days). Future limit increases will likely be smaller, and they should be (you probably shouldn’t be doubling your limit repeatedly). When you make an offer for the limit you would like, the creditor may come back with a lower counter offer, which in many cases is a good idea to accept.
This is important not because it allows you to spend more money, but because it can benefit your credit score. By having a higher limit reported to the bureaus, any balance you have will show up as a lower utilization ratio. For instance, if you have a $5,000 balance and a $10,000 credit limit, you are using 50 percent of your available credit. If your limit was $20,000, your utilization would drop to 25 percent, which could have a positive impact on your credit score.
Pro tip: Do some research in credit card forums (like http://ficoforums.myfico.com) to learn tips for getting a credit limit increase on your specific credit card.
#4 Rewards are Rarely Good Deals
Credit card rewards are all the rage, and in some cases the hype is legitimate. But often, consumers get a little too excited about credit card rewards and end up overspending. There are two primary traps to watch out for:
Dollar-for-dollar rewards. These are a bad idea, especially if your card offers cash back. It just does not make sense to trade in 100 reward dollars for a $100 gift card to a store like Wal-Mart. In that case, it would be much better just to take the cash back (even if it is a statement credit), because by doing so you will maintain $100 you can spend anywhere, which is better than $100 that much be spent at a particular store.
A better deal would be something like a $100 gift card to Wal-Mart that only costs 80 of your rewards dollars. These deals are more rare, but they come up during specials, such as near the holidays. While these can be a good deal, this is where we have to watch out for trap #2 – taking an unnecessary deal. If your credit card is offering a price discount on travel or retail purchases, for example, those can look pretty tempting. They are, in fact, good deals. But even 50 percent off a travel booking isn’t a great deal if you don’t really need to travel or if having cold hard cash instead would present a noticeable advantage.
Keep these pitfalls in mind when you spend your rewards points. If you are working toward some big financial goals and keeping your “wants” purchases to a minimum, cash back is almost always the way to go.
#5 The Numbers Actually Mean Something
We don’t often think twice about our credit card numbers, although the die-hard online shoppers probably have them memorized. But believe it or not, they represent a unique combination of issuer numbers, bank numbers, account numbers and check digits. And, the credit card company you use determines what the first number on the card will be. Pretty interesting stuff, right? Read our explanation of what credit card numbers mean to learn more.
So there you have it. Hopefully we taught you something new about your credit card. Continue to spend with it responsibly, and if you find yourself behind on payments or burdened by high interest rates and fees, be sure to let us know. We’d be happy to help you make an action plan during a free credit counseling session.