Jun
22
2023
how to increase credit limit

How to Increase Your Credit Limit

By | Credit, Financial Independence | Comments Off on How to Increase Your Credit Limit

Most credit cards come with credit limits that determine how much you can spend at any given time. Requesting a credit line increase is something you might consider if you’d like to have more purchasing power, you want to schedule a balance transfer, or you need a cash advance.

Asking for a higher credit limit can be as simple as calling the credit card company or completing an online form. In some cases, a credit card company may grant one automatically based on an account history.

Increasing available credit can also improve credit utilization, which could raise your credit score. But asking to increase credit limits for one or more cards could potentially cost you points if it involves a hard credit inquiry.
Knowing how to increase a credit limit the right way can minimize credit score impacts.

Why Credit Limits Matter for Credit Scoring

Credit scores are a measure of your ability to manage debt responsibly. FICO® Scores, which are used by 90% of top lenders, are calculated using these five factors:

•  Payment history (35% of your score)
•  Credit utilization (30% of your score)
•  Length of credit history (15% of your score)
•  Credit mix (10% of your score)
•  New credit inquiries (10%)

Credit limits are important because they can affect the credit utilization part of your credit score. Credit utilization refers to the percentage of your available credit you’re using. For example, if you have a credit card with a $5,000 limit and a $1,000 balance, your credit utilization is 20%.

Using a lot of your available credit can be detrimental to your credit scores, while keeping balances low can improve your scores.

Generally, it’s recommended that you keep the ratio at 30% or less for the most favorable credit score impact. A higher ratio could suggest to lenders that you may be struggling to manage spending and debt.

Does Requesting a Credit Increase Hurt Your Score?

Whether a credit line increase hurts your credit score, or affects it all, depends on how the credit card company reviews your financial information. Specifically, it hinges on whether the credit card company performs a soft or hard inquiry into your credit history.

Remember, credit inquiries account for 10% of your FICO credit score. An inquiry simply means that you have authorized a creditor or biller to review your credit reports and scores. (Inquiries for credit remain on your credit report for two years, though they only affect FICO credit score calculations for 12 months.)

When requesting an increase in credit limit that involves a hard pull, you may lose a few credit score points. While the impact isn’t as significant as a late payment or a maxed-out credit card, it’s still worth noting.

If you were to ask for a credit line increase from several cards at once, multiple hard inquiries could cost you more points.

A soft inquiry, on the other hand, has no credit score impact. Checking your own credit score, prescreened credit offers, and credit screenings that are required as part of an employer’s hiring process are examples of soft pulls.

Can a Credit Line Increase Positively Impact a Credit Score?

While you may lose a few points initially if your credit card company performs a hard inquiry, asking to increase your limit could help your credit score over time.

It all goes back to credit utilization. If raising your credit limit on one or more credit cards improves your credit utilization, then you may see a positive effect on your credit score.

Say you have a card with a $10,000 limit and a $5,000 balance. That puts your credit utilization at 50%. But if you can increase the credit limit to $15,000, you instantly shrink your credit utilization to 33%.

The key to making this strategy work is not adding to your debt balance. Going back to the previous example, say that you have to unexpectedly replace your HVAC system to the tune of $5,000. You decide to take advantage of your new higher credit limit to make the purchase.

Now your balance is $10,000. While you still have a $5,000 available credit cushion, you’ve increased your credit utilization to 66%. That could result in a credit score drop until you’re able to pay some of the balance down. So, while asking for a credit line increase can give you more purchasing power, that can work against you if you use it.

Four Ways to Increase a Credit Limit

There are several ways to get a credit line increase, depending on what your credit card company offers. There are different types of credit cards, and card issuers don’t always follow the same policies with regard to credit limit increases.

Before asking to increase your credit limit, get familiar with the various ways your credit card company allows you to do it. Then consider how much of a credit limit increase you’d like to ask for.

Keep in mind that whether the credit card company grants your request can depend on things like:

•  How long you’ve been a customer
•  Your account history, including payment and purchase history
•  Your income
•  Credit scores, if a hard pull is required

With that in mind, here are four ways to get a higher credit limit:

Request a Credit Line Increase Online

Your credit card company may make it easy to ask for a higher credit limit online. Log in to your account, navigate to the Request Credit Limit Increase section, and fill out the relevant details. You may need to update your income information.

If your credit card company offers this option, it’s possible to be approved for a credit line increase almost instantly. But a decision may be delayed if the credit card company wants to take time to review your account or credit history.

Update Your Income Information

Credit card companies may periodically ask you to update your income information when you log in. You may be tempted to skip over this step, but it’s worth taking a moment to do, as the credit card company may use the information to grant an automatic credit limit increase.

Again, whether you’re eligible for an automatic credit line increase can depend on the type of your card and your account history, income, and overall financial situation.

Call and Ask

If your credit card company doesn’t allow for automatic increases or credit limit increase requests online, you can always call and ask for a higher limit. You may need to tell them your income, specify how much of a credit limit increase you’d like, and provide a reason for the request.

Calling the credit card company may also be worthwhile if you’ve been denied for a credit limit increase online. You can ask the card provider to reconsider your request, but be prepared to make a strong case (e.g., significantly higher income, on-time payment history) for why it should do so.

Open a New Credit Card Account

If you’ve tried other avenues for requesting an increase in credit limit and been unsuccessful, you could always consider opening a brand-new credit card account. The upside is that you can expand your available credit if you’re approved, which could improve your credit utilization ratio.

The downside of opening a new credit card is that applying can ding your score, since it typically involves a hard inquiry. But if you’re able to keep your credit utilization low, that could help make up the difference in lost points relatively quickly.

The Takeaway

How to increase your credit limit? If you have good credit, requesting a higher credit limit may be easy. The key is knowing how to make the most of a credit limit increase to improve your credit score.

Keeping your balances as low is a step in the right direction. Paying your balance in full each month is even better, since this can help you avoid paying interest on credit cards.

Finally, spacing out credit line increase requests and opening new accounts sparingly can help keep credit scores on track.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Jun
22
2023
How Do Credit Card Payments Work?

How Do Credit Card Payments Work?

By | Credit | Comments Off on How Do Credit Card Payments Work?

If you’re not a seasoned credit card user, you might have questions about credit card payments and their impact on your credit.

Used smartly, a credit card can be a great financial tool, but the key is not charging more than you can afford to pay back and making payments on time each month.

The Benefits of Using a Credit Card

A credit card is convenient if you don’t have cash on hand to make a purchase. As long as you know you can pay back what you charge, either in full or over a few months, a credit card can be a useful tool.

There may also be situations like renting a car or booking a hotel room when you are required to have a credit card to avoid a deposit. The hotel or rental company will place a hold on your card so that in the event of damage or other expenses you need to cover, the company knows you can pay them. With a debit card, you may have that same hold of several hundred dollars tying up your funds for several days.

Another benefit of credit cards is the ability to earn rewards. Many cards give you points for purchases that you can redeem for travel, cash back, or other perks, and if you pay your balance before accruing interest, it can be like the card is paying you to use it.

Potential Downsides of Using a Credit Card

On the other hand, credit cards can cause issues if you don’t exercise good behavior in terms of your credit card payments. Each month, you are charged interest on your purchases. The interest is calculated by dividing your card’s annual percentage rate by 365 to get the daily rate, and then multiplying your current balance by the daily rate.

That may only amount to a few extra dollars a month, but if you don’t pay your balance in full for several months, that amount can snowball, and what you initially charged can easily cost you a lot more.

Another thing to be aware of is the fact that credit card companies charge fees in addition to interest. Some charge an annual fee (usually for cards with rewards programs).

Cash advances come with a fee and a higher interest rate than for purchases.

There are also late credit card payment fees to watch out for. Not only will you be charged a fee if you don’t pay the minimum due by the payment due date, but it may appear on your credit report as a negative mark. This may hurt your credit scores and your ability to take out other financing later.

How Credit Cards Impact Your Credit Scores

While a late payment can negatively affect your credit scores, credit card payments made on time can actually help your credit scores.

Each time you make a payment on time, it is reported to credit bureaus like Experian, Equifax, and TransUnion. Over time, on-time payments may factor into the algorithms the credit bureaus use to determine your credit scores, and may raise your number a few points.

Each bureau has its own formula for how scores are determined, and not every credit card company reports to each bureau, so there’s no easy way to know how your payments directly affect your score. But in general, paying on time is behavior that will benefit you over time.

Understanding Credit Utilization

Another factor that goes into your credit scores is credit utilization. This is a calculation of how much credit you have available to access compared with how much you are actually using.

Let’s say you have three credit cards and a total available credit of $15,000. You have a balance of $2,000 across all of them. By dividing the balance by the total credit available, you get 0.133, or 13% credit utilization.

When applying for new credit cards or loans, lenders will look at your credit utilization. If it’s too high—most look for a rate of under 30%—you may not be approved for the card or loan. That’s why it’s important to stay on top of how much of your total credit you’re using and pay down your debt so you don’t have a high credit utilization rate.

How to Build Your Credit With a Credit Card

Once you understand how credit card payments work, you may use credit cards to build your credit, even if you have low scores to begin with. These habits may help you build your credit and improve your credit scores over time.

1. Pay Your Bill on Time Each Month

We’ve covered the importance of making your credit card payments on time. For some people, it can be helpful to put the credit card due date on a calendar (leaving a few days for the payment to get to the company and be processed) to ensure they don’t have late payments.

Many people find autopay, used wisely, a great tool.

If you’ve just received your first credit card, find out how to make credit card payments long before your first one is due, as you might need to set up your bank account information to send an electronic payment, and you want to allow time for that process to be finalized before the due date.

2. Pay More Than the Minimum

If you only charge what you can afford, you should be able to pay off your balance each month, but there may come a time when you have an emergency that requires a larger charge you can’t pay off all at once.

In that case, you may be tempted to pay the minimum amount due, but realize that in doing so, you will pay more in the long run, as those interest charges will snowball. Even if you pay just $5 a month more than the minimum due, you can cut down on interest and pay off your balance faster.

This will also reduce your credit utilization rate and may improve your credit scores.

3. Review Your Credit Report Regularly

Working on your credit involves more than just making credit card payments on time. Access your credit report from Equifax, Experian, and TransUnion (it’s free to do so once a year) and review it for accuracy. Make sure the payments you’ve made are reported as on-time, and look at your list of trade accounts to make sure there are no errors.

For example, maybe you closed a credit card six months ago, but it still appears on your credit report. This is a discrepancy that you can report to the bureau (each bureau’s website has information on how to report a discrepancy). Check again after you report it (allowing for time to process your request) to ensure it has been removed.

Regularly reviewing your credit report will also alert you to any fraudulent activity that might occur. It’s rare, but identity theft does happen, and you’ll want to know if someone is using your identity to open credit cards or take out loans.

4. Only Charge What You Can Afford

Credit cards can be tempting. Without discipline, you might feel like taking a shopping spree, ignoring the financial consequences.

As mentioned as a credit card tip, only charge what you can afford to pay back in a reasonable time frame. A credit card isn’t meant to be free money, and overspending with one can cost you much more than you initially spent.

The Takeaway

Using credit cards responsibly and making credit card payments on time (and in full, when you can) can set you on the path to financial success. The key is to be aware of your spending and your credit utilization so you can help your credit scores grow over time.

1See Rewards Details at SoFi.com/card/rewards.

SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, a statement credit, or pay down eligible SoFi debt.

*See Pricing, Terms & Conditions at SoFi.com/card/terms
The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Jun
22
2023
Creditworthiness Explained

Why Does Creditworthiness Matter?

By | Credit, Financial Independence | Comments Off on Why Does Creditworthiness Matter?

When you take out a loan or line of credit, the lender extending you that credit is taking a risk. As you know if you’ve ever loaned a friend or family member a quick $5 (or $500), once money has been lent, it might not ever be seen again.

Creditworthiness is the measure a lender uses to determine how big of a risk a certain borrower might be, depending on their past behavior with credit. You’re probably familiar with your credit score, which is one part of your creditworthiness, but it’s not the whole picture.

Let’s dive into the nitty-gritty of how creditworthiness is determined and why it’s important.

What Is Creditworthiness and Why Does It Matter?

In short, a consumer’s creditworthiness is what lenders assess to hedge their bets that the borrower won’t default on—fail to repay—a loan.

You can think of creditworthiness a bit like a report card for borrowers. Like a report card, your overall creditworthiness is composed of a variety of factors, each of which is weighted differently. The factors are calculated into an overall credit score, which is a bit like a grade point average (GPA).

Like a report card, your creditworthiness gives lenders a snapshot of your historical behavior—and although your past doesn’t always predict the future, it’s the main information creditors have to go on about how much of a risk you might be.

Creditworthiness is possible to improve, but doing so takes dedicated effort.

Why Does Creditworthiness Matter?

Creditworthiness is important because these days, you simply need credit to get by. It’s not just about credit cards. Your creditworthiness will be assessed if you ever take out an auto loan or mortgage, or if you’re just signing a lease on a rental property. Your credit report might even be pulled as part of the job application process as an indication of your level of personal responsibility.

What’s more, higher creditworthiness tends to correlate with better loan terms, including higher limits and lower interest rates. Lower creditworthiness can mean you’re stuck with higher interest rates or extra fees, which, of course, make it more difficult to make on-time payments, get out of debt, and otherwise improve your creditworthiness for the future. A low enough level of creditworthiness may preclude you from qualifying for the loan (or lease, or job) altogether.

In short: Creditworthiness is really important for just about everyone, and it’s worth improving and maintaining.

How Is Creditworthiness Calculated?

So what specifically goes into the definition of creditworthiness?

That depends on whom you ask. Which factors will be most heavily weighted to determine your creditworthiness change based on what kind of credit or loan you’re applying for.

A credit card issuer, for example, may look specifically into your experience with revolving debt, while a mortgage lender may be more concerned with how you’ve handled fixed payments like installment loans.

While each lender will have its own specific criteria and look into different things, one of the most common measures of creditworthiness is a FICO® Score—the three-digit credit score based on information reported by the three main America credit bureaus, Experian, Equifax, and TransUnion.

It’s important to understand that lenders will see more than just a three-digit FICO Score. The credit report they pull may also include specific information about your open and closed accounts, revolving credit balances, and repayment history, as well as red flags such as past-due amounts, defaults, bankruptcies, and collections.

Lenders may also take your income and the length of time you’ve worked at your current job into consideration, as well as assets (like investments and properties) you own.

You may already know that credit scores range from poor (579 and below) to exceptional (800 to 850). But those scores are underpinned by a specific algorithm that takes a variety of different historical credit behavior into account.

Specifically, your FICO Score is calculated using the following data points, each of which is weighted differently:

•   Payment history, 35%: The single most important factor determining your credit score is whether or not you’ve consistently paid on your loans and credit lines on time.
•   Amounts owed, 30%: This factor refers to how much of your available credit you’re currently using. Having higher balances can indicate more risk to a lender, since it may be more difficult for someone with a lot of debt to keep up with paying a new account.
•   Length of credit history, 15%: Having a longer credit history gives lenders more context for your past behavior, so this factor is given some weight in determining your credit score.
•   Credit mix: 10%: This factor refers to how many different kinds of credit you have, such as installment loans, credit cards, and mortgages. It’s not necessary to have each, but having a healthy mix can boost your score.
•   New credit, 10%: Applying for a lot of new credit recently can look like a red flag to lenders, so having too many hard inquiries can ding your score.

Recommended: What Is a FICO Score and Why Does it Matter?

Building Creditworthiness

If you have a low credit score or a number of negative factors on your report, you may feel overwhelmed at the prospect of changing your creditworthiness for the better. But the good news is, it is possible to positively impact your credit score and build your overall credit profile. It just takes time, dedication, and persistence.

Given the importance of payment history, making on-time payments is usually the most important thing you can do to improve your credit score.

Because the amount of revolving debt you have is an important metric, reducing your overall debt can help, too—and will free up more money in your budget to put toward other financial goals.

If you’re working to pay off certain credit cards, it may not be best to close them once you’ve stopped using them. Keeping them open will help increase the overall length of your credit history—though you may need to charge (and then pay off) a nominal amount each month to keep the card issuer from closing the account due to inactivity.

You may want to use that credit card for one low monthly bill, such as your Netflix subscription, and pay it off in full each statement cycle.

It’s also a good idea to check your credit report at least once a year. The Fair Credit Reporting Act requires that the three big credit bureaus provide you with a free copy of your credit report once every 12 months. Although other websites might have catchy jingles, the only free credit report source authorized by federal law is annualcreditreport.com .

These reports don’t include your credit scores, but you’ll still get the opportunity to assess your report for fraudulent items and dispute them.

You may also be able to get your credit score for no charge as a perk for opening a certain bank account, credit card, or money-tracking app like SoFi, as well as any time a lender makes a hard inquiry into your credit.

The Takeaway

Creditworthiness is the measure by which a potential lender assesses how much of a risk it’s taking by offering you a loan or line of credit. Building your creditworthiness and maintaining it is important for ensuring you have access to loans, credit cards, and even employment opportunities.



The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

*See Pricing, Terms & Conditions at SoFi.com/card/terms.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

1See Rewards Details at SoFi.com/card/rewards.

SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, a statement credit, or pay down eligible SoFi debt.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Jun
22
2023
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Understanding Statement Credits

By | Credit, Financial Independence | Comments Off on Understanding Statement Credits

Credit cards are one of the most accessible credit-building tools in your arsenal, but rewards are also part of the appeal. A statement credit is one way to redeem rewards you’ve earned.

If you look through your statement balance and find that money was put back into your account, that’s a statement credit.

Knowing how you earned that money can help you take advantage of your credit card’s rewards system in the future.

What Is a Statement Credit?

Credit card companies use a statement credit to issue a credit to your accounts, such as cash back or other rewards you have earned. Essentially, you receive money from your card issuer for a specific reason.

Finding documentation of your statement credit varies among credit card companies. Generally, though, you will see it on your monthly statement under transactions or account activity.

If you check your statements online, you’ll probably see the credit appear in green text.

Regardless of the format, a statement credit has a minus sign in front of the cash amount, thus decreasing your revolving balance.

How to Receive Statement Credits

There are a few ways a statement credit might apply to your account. A common reason is through a return.

If you have ever returned an item you bought using your credit card, the retailer will probably refund the money borrowed from your card issuer. You’ll receive a statement credit that matches the price of the returned item.

Other than returns, ways you may receive a statement credit include:

•   Shopping benefits. Some card providers offer discounts or statement credits for shopping with specific merchants.

•   Travel credits. Card providers may offer annual statement credits to pay for eligible travel expenses like a luggage fee or plane tickets.

•   Rewards. Card providers that offer cash back, points, or miles may let you redeem them in the form of a statement credit.

Statement Credits vs. Cash Back

Your credit card company gives you options when you sign up for a rewards credit card. One choice may be cash back or statement credits.

Cash back sounds simple enough, but it doesn’t always mean you’ll get direct money. Instead, your issuer may offer a cash reward in the form of a credit put on your account. Occasionally, they may send you a physical check or deposit the money in your checking account.

You earn cash back as a reward for using the credit card. It is a percentage of the money spent on purchases using the card.

In comparison, a statement credit reduces your credit card balance. Carrying a high balance between periods could lead to a high credit utilization ratio, which shows the amount of available credit a person has. That can result in a lower credit score over time.

Are Statement Credits Taxable?

The type of credit or reward you receive determines whether it’s taxable. If the credit card holder spent money to earn the reward, they usually don’t have to pay taxes on it. If they receive the credit without any spending, the reward may be taxable.

For example, an individual receives money back on her account after returning a chair she purchased online. That credited amount would not be taxable.

Cashback earners who engage in programs for points, like travel rewards, also generally avoid taxation.

The primary instance where cardholders face a taxable reward is with sign-up bonuses.

If they did not have to purchase anything to earn the bonus, it’s probably taxable. The taxation may apply regardless of how the credit card company issues the bonus, whether it’s in cash or airline miles.

Using Your Rewards Wisely

Credit cards come with responsibilities, but they have their perks.

Consider using statement credits put on your account to lessen your balance. Or look into the various rewards your card issuer offers.

You may even be among the 23% of Americans who didn’t redeem any of your stockpiled rewards in 2022. So you might be missing out on rewards that you could use for some of your favorite services.

When shopping for a new card, you may want to look closely at the points, cash back, or miles involved. How are the rewards offered, how are they redeemed, is it better for you to get a card with consistent points across all purchases or increased rewards in certain areas?

Think through which rewards best fit your lifestyle and interests. If you want to see the world, you may want to get a card that optimizes travel benefits. If you’re an investor or someone interested in student loan refinancing, at least one card is geared toward those preferences.

The Takeaway

What is a statement credit? It’s a reduction in a credit card balance. Many credit cards offer statement credits as one way to redeem travel, cashback, or other rewards.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Jun
21
2023
credit card transaction

Breaking Down the Different Types of Credit Cards

By | Credit, Financial Independence, money, personal_loan | No Comments

With so many credit card options out there, it may be hard to choose a new one.

Are you loyal to a particular airline or hotel chain? Perhaps you want to redeem credit card points as statement credits. Or you’re a big grocery or gasoline spender. Savvy consumers may be interested in innovative uses like paying down loan debt or investing. Is the interest rate important, an annual fee a dealbreaker?

If you can responsibly manage more than one credit card — and if you’re like most Americans, you have more than one — you can use different cards to optimize rewards (cash back, points, or miles), annual statement credits, and 0% and low introductory APR offers.

When deciding on a new credit card that is best for you, it boils down to two basic questions: What do you want from a card? And how strong is your financial history?

Here’s a glance at the credit card options available and provisos to consider.

Recommended: What Is the Average Credit Card Limit?

Rewards Credit Cards

If you are good about paying off your card every month and never incur interest, you might consider a rewards card. These cards may offer sign-up bonuses and give consumers rewards in the form of miles, cash back, or loyalty points.

There are variations on a theme, such as:

•  Bonus offer + 0% period for purchases

•  A set dollar amount in travel or bonus miles if you meet the initial spending requirements

•  Flat-rate cash back

•  Customizable rewards

A few cards offer an eye-opening 5% cash back in rotating categories, up to a limit (such as 5% back on $1,500 spent quarterly, after which all other purchases earn 1% cash back), and you’ll usually have to manually activate the offer each quarter.

But you can often lessen the work involved and earn more in total cashback rewards with a flat-rate cashback credit card, when all purchases earn the same amount.

Frequent travelers lured by premium travel rewards cards will want to weigh the perks against an annual fee of $450 to $550.

New reward offerings have bubbled up, such as allowing cardholders to put cash back toward loan payments, and are brewing, like increasing card acceptance for rent payments and offering cryptocurrency-related rewards.

When choosing a rewards card, think about your spending habits and redemption preferences, be aware of your credit score (these cards usually require a good score), and pay off your balance each month — rewards cards typically have higher APRs than balance transfer cards.

If you fall behind on payments or carry over balances, all the perks and rewards are unlikely to be worth it.

Recommended: What Is a Charge Card?

Cards for Those With Limited or Damaged Credit

For college students with little or no credit history, there are student credit cards.

If you don’t have great credit, there are also secured credit cards. Generally, they require a deposit from the user. A secured credit card functions like a normal credit card except that it has a backstop: The user puts up an amount of money that the issuer will then use if the cardholder defaults.

The lender offers a certain amount of credit based on the promise that the user will pay off the balance in full every month.

If your account is upgraded to an unsecured account, thanks to good habits, or is closed in good standing, your deposit is returned.

Both of these options can help someone build credit and could lead to a card with more perks if the holder is diligent about paying off the balance every month.

Then there’s at least one brand of card that considers an applicant’s banking history in lieu of their credit score, has no annual fee, and comes with rewards.

Recommended: Tips for Using a Credit Card Responsibly

Prepaid Debit Cards

A secured credit card is primarily intended for building credit, whereas a prepaid debit card is good for budgeting and convenience but does not affect your credit.

A prepaid debit card is preloaded with your own money, typically through direct deposit, cash or check deposits, or online transfers from a checking account.

The card is used for transactions until the money runs out. Since there is no line of credit, you cannot run up debt on the card.

This is a great option for a young person who needs to learn how money works or for adults with a bad credit history, though it will not improve their credit scores.

Credit Cards That Save You Money on Interest

If you’re prone to carry a balance month to month, you might want to consider a low-interest card. While these types of credit cards don’t come with bells and whistles like airport lounge access, it is the financially prudent option if you have an irregular income or you carry a balance each month.

It might be best to look for a card that offers an initial APR of 0% and then an ongoing low interest rate.

Keep in mind that low-interest credit cards usually require a good credit score to qualify. Generally, the better your credit score, the lower your interest rate. The lowest advertised APR isn’t always what an applicant gets.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

Balance Transfer Credit Cards

If you are in credit card debt, a balance transfer credit card could help you pay off your debt at a lower interest rate.

Interest rates and terms vary widely with balance transfer credit cards. A balance transfer card will often come with a 0% APR introductory period, but once that ends, the interest rate shoots up.

It’s important to pay attention to the fine print if this is an option you’re considering.

The Takeaway

Choosing the most rewarding and suitable new credit card can become a research project. It’s best to think about your spending habits, needs, credit history, APR, any annual fee, and perks.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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