19 Common Credit Card Mistakes and Tips for Avoiding Them

Credit cards, when used responsibly, can enhance your financial life, allowing you to build your credit score, earn rewards, and more. Unfortunately, if you’re not careful and make credit card mistakes, using a credit card can have the opposite effect on your financial life.

Here are some of the most common credit card mistakes to avoid, including some specific travel credit card mistakes to watch out for.

Credit Card Mistakes to Avoid

When using your credit card, here are some credit mistakes you could be making — and how you can avoid them by following some basic credit card rules.

1. Making Late Payments

Payment history is one of the most significant factors in determining your credit score. The more payments you miss, the more your credit score could go down, and it could take a fair amount of time to repair your credit.

A late or missed payment can stay on your credit report for up to seven years (unless you can prove it was a credit report mistake).

How to avoid it: Set up automatic payments, or set reminders to help yourself remember when your credit card payment is due.

2. Making Only Minimum Payments Monthly

While making minimum payments is important to avoid incurring late fees, it won’t allow you to avoid interest charges. In fact, by only making the minimum payment, you’ll end up paying a high amount of interest (assuming you’re not using a card in its 0% introductory period). You also risk getting further into debt if you keep using your credit card, and it could take years to pay off your balance in full.

How to avoid it: Budget carefully so you can pay off more than the minimum amount due or ideally, the entire balance off each month.

3. Misunderstanding Credit Card Interest

Interest is a key part of what a credit card is, but the way credit card interest is charged can be confusing. A credit card can have a few different annual percentage rates (APR) depending on the type of transaction, including on purchases, cash advances, and balance transfers.

The bottom line: To avoid interest on new credit card purchases, make sure to pay off your balance in full each month. You’ll owe interest on any amount you carry over.

How to avoid it: Check your credit card agreement to understand how interest is charged, and aim to pay off your balance in full to avoid incurring interest.

4. Ignoring Your Credit Card Agreement

Credit card agreements contain important details like fees, your credit limit, and other important terms you’ll benefit from knowing. Ignoring credit card terms could lead to nasty surprises, like fees you didn’t anticipate paying.

How to avoid it: Set aside time to read your credit card agreement, and contact your credit card issuer if you have any questions about how credit cards work.

5. Neglecting Your Monthly Statement

It might seem like a slog, but reading your monthly statement is important to staying on top of your credit card account. For starters, it includes a plethora of important information, such as your statement balance, the amount of your minimum payment owed, and your payment due date. Plus, regularly reviewing your credit card statement can ensure you quickly spot any signs of fraud.

How to avoid it: Set reminders to look at your monthly statement to see how much you owe, and make sure to dispute credit card transactions you didn’t approve.

6. Getting Close to Your Credit Limit

Your credit card limit is the amount that you can charge your card. If you get close to hitting your limit, it could hurt your credit score because you’ll have a higher credit utilization ratio. This ratio compares your balance to your available credit, and the higher it is, the more adversely it could affect your score.

How to avoid it: Monitor your balance to ensure you’re not close to your limit — ideally, you’re only using up to 30% of what’s available to you or less. Some financial experts suggest using no more than 10% of your limit.

7. Applying for Multiple Credit Cards at Once

Each time you apply for a new credit card, lenders will conduct a hard inquiry, which tends to temporarily lower your credit score. While this dip might not make a huge difference, applying for multiple accounts could cause lenders to take pause. It can possibly give them the wrong impression as to why you want so many new cards.

How to avoid it: Get preapproved for a credit card before applying to see your chances of getting approved before submitting a full application.

8. Applying Without Comparing Credit Cards

There are many benefits and features that come with credit cards, and without comparing them, you may not end up opening a card that’s not the right fit. By shopping around and exploring different credit card rewards, you’ll ensure you understand your options and get the most competitive choice available to you.

How to avoid it: Take the time to think about the features you want the most from a credit card and do some research to narrow down your choices before applying.

9. Canceling Your Card on a Whim

Canceling a credit card could mean the issuer will require you to pay off your entire balance with interest. Plus, it could affect your credit utilization ratio since it will lower your overall credit limit. It also could shorten the length of your credit history, which is another factor used when calculating credit scores.

How to avoid it: Consider the consequences of canceling your credit card, and make sure to pay off the entire balance before you do so.

10. Not Reporting Lost or Stolen Credit Cards Instantly

The longer you go without reporting a lost or stolen credit card, the more likely you’ll be responsible for fraudulent changes that show up. Some credit card companies waive all fraudulent charges (or up to $50) as long as you’re quick to report.

How to avoid it: As soon as you notice your card missing, report it to your credit card company, and then continue to monitor your statements for any fraudulent charges.

11. Loaning Your Credit Card

When you give your credit card to someone else to use, you’re still responsible for the charges made on it. If the person you lent your credit card to doesn’t pay you back, then you’re stuck with the bill. The same applies with an authorized user on a credit card — you’re the one ultimately responsible for paying even if you didn’t make the charges yourself.

How to avoid it: Don’t let anyone borrow your card, and if you do, ask them to pay you upfront for the changes they intend to make.

Travel Credit Card Mistakes to Avoid

In addition to the mistakes above, take care to avoid these particular mistakes if you have a travel rewards credit card.

12. Overspending

To earn welcome or bonus offers, credit card companies typically require you to spend a minimum amount within a certain period of time. If you don’t plan ahead properly, you could end up making unnecessary purchases and racking up charges you can’t afford to pay off.

How to avoid it: Have a plan for how you’ll meet the minimum spending requirements, such as by timing a necessary big purchase with opening a new card.

13. Underspending

On the opposite spectrum, opening a new credit card and not meeting the minimum spend requirements could mean you’re disqualified from earning the welcome bonus. This would mean passing up a big benefit of getting the card.

How to avoid it: Review your spending habits before opening a credit card to ensure you can meet the card’s minimum spending requirements.

14. Spending Points vs Paying a Low Cash Price

Redeeming your credit card points is fine (it’s free!), but spending them on low-value rewards may be a waste. For example, you might be able to nab a flight or hotel at a much lower price in cash than you’d get if you used points for the purchase.

How to avoid it: Research reward redemption options to ensure you maximize the value from the points you’ve earned.

15. Not Using Your Benefits

Travel credit cards can offer other perks, such as annual credits toward travel and free stays at hotels. However, you’ll typically need to take advantage of them within a year, and they won’t roll over. In other words, if you don’t use these benefits in time, they’ll go to waste.

How to avoid it: Read your credit card agreement to see what additional benefits you can take advantage of.

16. Losing Your Points

Some points earned through rewards programs expire. In other cases, you’ll automatically lose your points when you decide to cancel your credit card.

How to avoid it: Use up your points before canceling your card, or check if they expire and make sure to use them up in time.

Recommended: What Is a Charge Card?

17. Failing to Transfer Points

Most card issuers allow you to transfer points to travel partners like airlines and hotels. This can offer a greater value for your points compared to what you’d get through the card issuer’s travel portal.

How to avoid it: Before booking travel, check whether it’s more valuable to book through the card issuer’s travel portal or by transferring points instead.

18. Not Understanding Credit Card Bonus Categories

Many travel credit cards offer bonus points if you spend in certain categories. These bonus rewards tend to vary for different cards. Not understanding what each card offers could result in losing out on earning extra points.

How to avoid it: Read through the terms and conditions of each travel credit card you own to ensure you’re maximizing your earnings.

19. Redeeming Points at Low Value

Not all points are created equal. You might not get the same value from your travel points if you redeem them for a gift card as opposed to with partner hotels or airlines, for instance.

How to avoid it: Do your research on how best to redeem your rewards for your credit card to get the most value.

Recommended: When Are Credit Card Payments Due?

The Takeaway

Knowing and avoiding common credit card mistakes can be a good way to avoid excessive credit card debt and keep your finances in good order. Responsible use of credit can be a foundation of financial fitness. What’s more, avoiding credit card mistakes can also help you enjoy perks, like rewards, that come with your account.

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.

FAQ

What are some of the most common credit card mistakes?

Some of the most common credit card mistakes include not paying on time, only making the minimum payment, and not understanding the terms of your credit card agreement.

What credit card mistakes can damage my credit?

Major factors that can damage your credit include late or missed payments, having a high credit utilization ratio, and having too many new credit inquiries. Making all of these mistakes can lead to damage to your credit.

Can problems arise from not using my credit history?

Having a lack of credit history could make it harder to qualify for loans. Or you may only qualify for ones with higher interest rates.


Photo credit: iStock/Mikolette

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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Available Credit vs Credit Limit: What Are the Key Differences?

Available Credit vs Credit Limit: What Are the Key Differences?

Your available credit and the total credit limit on a particular credit card are both tied to the potential amount that you can spend. Your credit limit is the total amount of credit that the card issuer is willing to lend you. On the other hand, your available credit is the potential amount you can spend right now.

Unlike your credit limit, your available credit takes into consideration your outstanding balance and any pending charges. So, for example, if your total credit limit is $10,000, and you have an outstanding balance of $2,000, then your available credit is $8,000.

What Is Available Credit?

Your available credit on a credit card is the total amount that you can spend on your credit card. It is usually calculated as the total credit limit minus any outstanding balance or pending charges. If you attempt a transaction that is larger than your available credit, the credit card company will typically decline the transaction.

What Is a Credit Limit?

The way most credit cards work is that the credit card company issues you a maximum amount that they are willing to lend you. This is called your credit limit. It is usually determined by your financial information, such as your credit score, income, and other items on your credit history.

Why Is Available Credit Important?

Your available credit is one of the most important things about your credit card. The amount of available credit you have is the total amount of money that you can spend on your credit card. If you try to make a purchase that’s more than your total available credit, your credit card company will usually decline your transaction.

Differences Between Credit Limit and Available Credit

The main difference between credit limit and available credit is one of a theoretical limit vs. a limit in practice.

Your credit limit is the theoretical limit that represents how much the credit card company is willing to lend you. If you’ve used a portion of your credit limit, then that amount is subtracted from your total credit limit and becomes your available credit. This is the maximum amount that you can spend right now on your credit card.

In other words, your credit limit will generally remain the same, whereas your available credit will vary based on your spending. When you haven’t spent any money using your credit card, meaning your balance is $0, your credit limit and available credit are the same.

What Happens If You Go Over Your Available Credit?

If you have a credit card balance or outstanding pending charges on your credit card, those amounts are subtracted from the total credit limit that you have on that card. This marks your current available credit, and it’s the maximum amount that you can charge on your credit card at the current point in time.

If you try to make a charge for more than your available credit, it’s likely that your credit card company will decline the charge. With some credit card companies or specific credit cards, it’s possible that the credit card company will allow a charge above your available credit, but they may charge interest and/or additional fees. Check with your credit card company for the specific rules and terms for your particular card.

What Happens If You Go Over Your Credit Limit?

If you continue to spend all of your available credit until you’ve reached your total credit limit, you may not be able to continue to use your credit card. You’ll first need to make payments to lower your total balance and raise your available credit.

In some cases, if you continue to keep your outstanding balance near your total credit limit, the credit card company may choose to close your credit card account. If this doesn’t happen, your card issuer may also increase your interest rate, lower your credit limit, or even raise the minimum payment requested.

Going over your credit limit can also have serious implications for your credit score. This is because credit utilization — how much of your available credit you’re currently using — is a major factor used to determine your score. It’s recommended to keep your credit utilization ratio below 30% to maintain a healthy score; if you’ve reached your credit limit, your utilization will be at 100%.

Recommended: When Are Credit Card Payments Due

How to Increase Your Available Credit

The best way to increase the available credit on your credit card is to spend less on your card and make additional payments toward your total outstanding balance. Every dollar that you pay toward your outstanding balance will increase your available credit.

Ideally, you’d get to a situation where you’d pay off your statement balance in full, each and every month. In that scenario, your available credit and your total credit limit would be equal.

How to Increase Your Credit Limit

You have a few options for increasing your credit limit. Some credit card companies will regularly review the accounts of their cardmembers, and proactively increase their credit limits.

You also have the option to contact your card issuer directly and ask them to increase your credit limit. Keep in mind that most issuers are more likely to increase your credit limit if you’re already using your credit card responsibly.

If you’re not having any luck increasing the credit limit on your existing credit card, another option is to open a new credit card. This could substantially increase your available credit if you’re approved — especially if the new card’s limit is at or above the average credit card limit.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

Your total credit limit and available credit are two terms that refer to the amount of money that you can spend on your credit card. However, there is a difference between credit limit and available credit. Your credit limit usually refers to the maximum amount that your card’s issuer is willing to lend you. Meanwhile, your available credit is the maximum credit limit, minus any outstanding balance or pending charges on the card.

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.

FAQ

Why is my available credit less than my credit limit?

Your available credit will often be less than your credit limit based on any outstanding balance or pending charges that you have on your credit card. If you have a total credit limit of $7,500 on a particular card, and an outstanding balance of $1,000, then your available credit is $6,500. The available credit amount is the maximum amount that you can charge on your credit card at the current moment.

Why is my available credit higher than my credit limit?

It’s rare that your available credit will be higher than your total credit limit. Instead, it’s much more common for your available credit to be less than (or equal to) your total credit limit. One scenario where your available credit may be higher is if you have a credit on your account, such as from a refunded transaction.

How is my credit limit determined?

Credit card issuers typically determine your total credit limit based on the financial information that you provide when you apply for the card. This includes your employment information, salary, and overall creditworthiness. If your financial situation has materially changed since you first applied or if you have a history of responsibly using your card, you may be able to contact your issuer and have your credit limit increased.

What is a good amount of available credit?

Currently the average credit card limit was just over $30,000, though credit limits vary widely by card issuer, credit card, and individual. A good amount of available credit is one that allows you to make all of the transactions that you need to make each month, with a little bit of buffer room, and without your utilization going above 30% of your limit. You should aim to put yourself into a financial position where you can pay off each of your credit card statements in full, each and every month.


Photo credit: iStock/Georgii Boronin

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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Buy Now, Pay Later vs. Credit Cards: What to Know

Buy Now, Pay Later vs Credit Cards: What to Know

Both Buy Now, Pay Later (BNPL) and credit cards are ways to spread out the payment for a purchase over time, but they have a few key differences. Buy Now, Pay Later plans typically have a specific number of payments that are determined upfront. You’ll often pay a portion at the time of purchase, and then make regular payments over time, often with zero interest.

In contrast, when you pay with a credit card, you may not have to make any payment immediately. Instead, the credit card company will send you a monthly statement. You’ll likely need to make at least a minimum payment and will owe interest on any remaining balance. As long as you continue to make at least the minimum payments, there’s no limit to how long you can take to repay your purchase.

Read on for more on the differences between Buy Now, Pay Later vs. credit cards.

What Is BNPL (Buy Now, Pay Later)? And How It Works

BNPL (Buy Now, Pay Later) is a type of installment loan that allows customers to purchase something (either online or in-store) and pay for it over time. In recent years, there’s been a big jump in the growth of Buy Now, Pay Later programs.

Several retailers and even some credit card companies offer Buy Now, Pay Later. The details of these programs vary depending on the merchant, but there are some similarities. With a BNPL plan, generally you make an initial deposit of around 25% at the time of purchase. Then, you’ll make a series of installment payments until your balance is paid off, similarly to how you would with layaway.

Recommended: When Are Credit Card Payments Due

Pros and Cons of Buy Now, Pay Later

Next, consider the pros and cons of Buy Now, Pay Later:

Pros

Cons

No hard pull on your credit to apply May influence you to make purchases outside your budget
Generally 0% interest or lower interest than using credit cards You won’t earn any rewards like you might by using a credit card
Can get approved even with less-than-stellar credit May hurt your credit if you miss payments or pay late

What Is a Credit Card? And How It Works

A credit card is a type of revolving credit that allows you to make charges against your line of credit.

When you apply for a credit card, the issuer will do a hard pull on your credit. If approved, you’ll be given a specific credit limit that is the maximum amount you can borrow.

As you borrow against that limit when using a credit card, your available credit is reduced. Similarly, it’s replenished when you make payments.

Each month, you’ll get a statement listing all of the charges you made that month, plus any outstanding balance. If you pay off the balance in full, you won’t be charged any interest due to how credit cards work. However, if you pay less than the full amount, you’ll owe interest on any remaining balance.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Pros and Cons of Credit Cards

Credit cards can serve as a useful financial tool when you use them responsibly and adhere to credit card rules. However, they also have the potential to cause harm. Here are some pros and cons of using credit cards:

Pros

Cons

Many more retailers accept credit cards than offer BNPL plans May encourage you to spend outside of your budget
Credit cards may offer cash back or rewards for using them Many cards come with high interest rates
Can help build your credit when used responsibly Can hurt your credit if you keep a balance or miss payments

Difference Between Buy Now, Pay Later and Credit Cards

While Buy Now, Pay Later plans and credit cards have some similarities, they have a few key differences. Here’s a look at BNPL vs. credit card distinctions:

Buy Now, Pay Later

Credit Cards

Opening the account Apply with participating retailers at the time of purchase; no hard pull on your credit required Apply directly through the credit card issuer; hard pull on your credit
How they affect credit scores Usually no effect on your credit score Can help build your credit when used responsibly, or hurt your credit when misused
Interest Often no interest when paid on-time in full Interest charged on any outstanding balance each month
Fees Often no fees when paid on-time in full Fees vary by credit card and issuer, including a fee for late payments
Rewards No rewards earned Many credit cards offer cash back or rewards for purchases

What Is a Buy Now, Pay Later Credit Card?

Traditionally many Buy Now, Pay Later plans were offered by companies that were not traditional credit card companies. However, several issuers are now starting to offer credit cards with Buy Now, Pay Later features available.

With these Buy Now, Pay Later credit cards, you can combine some of the benefits of both options. You can use your credit card like you normally would (including earning rewards) and then identify larger purchases that you’d like to pay for over time with the Buy Now, Pay later card feature.

Among the companies offering such products are American Express, Chase, and Citi.

Choosing a Buy Now, Pay Later Credit Card

Credit card issuers that offer Buy Now, Pay Later credit cards each run their programs slightly differently. You’ll want to look at the terms and conditions of each credit card you’re considering to see which works best for you. If the Buy Now, Pay Later options are similar, you can compare the credit cards themselves to find the best option.

Benefits of Buy Now, Pay Later Credit Cards

These are some of the upsides of BNPL credit cards to consider:

•   Earn credit card rewards on your purchases.

•   You can finance the purchase for a variable length of time.

•   Responsible and on-time payments can help your credit score.

Risks of Buy Now, Pay Later Credit Cards

That being said, there are potential downsides to know about too, including:

•   Buy Now, Pay Later cards may encourage you to spend more than you have.

•   Unlike traditional Buy Now, Pay Later plans without credit or debit cards, you may be charged a fee to pay for your purchase over time.

•   There is likely a minimum purchase amount you must meet to be able to use the BNPL feature of your credit card.

Recommended: How to Avoid Interest On a Credit Card

The Takeaway

Buy Now Pay Later and credit cards are two ways to pay for your purchases over time. With BNPL, you’ll usually pay an initial deposit at the time of purchase, and then you’ll make several fixed payments over the course of a few months. With credit cards, you have a set credit limit; each month, you’ll get a statement with your total monthly charges and any outstanding balance. If you don’t pay your statement balance in full, you’ll owe interest on any unpaid amount. Each option has its pros and cons. Another possibility is to get a Buy Now, Pay Later credit card, which combines features from both types of plan.

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.

FAQ

Is Buy Now, Pay Later better than a credit card?

Buy Now, Pay Later and credit cards can both be the right answer depending on your specific situation, so it’s hard to say that one is better than the other for every scenario. Buy Now, Pay Later can be a good option if you want to finance a purchase over a fixed period of time with low interest and fees.

Will BNPL affect my credit score?

Generally speaking, BNPL plans do not impact your credit score as long as you make your payments on time. However, if you do not fulfill your BNPL contract, your outstanding debt may be reported to the credit bureaus, which could have a negative impact on your credit score.

Will BNPL replace the use of credit cards?

While BNPL and credit cards are both financial instruments that allow you to pay for purchases over time, they have some important differences. Since they have different pros and cons, it is unlikely that one will completely replace the other. Instead, it is more likely that both will continue to be used in different situations.


Photo credit: iStock/RgStudio

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.

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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Credit Card Promotional Interest Rates: Understanding Special Offers on Credit Cards

Some credit cards offer a promotional interest rate, as low as 0% APR, for purchases and/or balance transfers. Often, these promotional interest rates are offered for a limited period of time when you apply for a new card, though some issuers offer promotional rates for existing cardholders as well.

If you have a large purchase coming up, or an existing credit card balance that you want to transfer over, these cards can save you a significant amount of interest. You’ll just want to make sure to pay off the full balance by the end of the promotional period, as your interest rate will likely jump significantly when your promotional APR expires.

What Are Credit Card Promotional Interest Rates?

A credit card promotional interest rate is an interest rate that is offered for a limited amount of time, as a promotion. During the promotional period, you’ll be charged a lower interest rate than your typical interest rate.

It’s common for credit cards to offer these introductory promotional interest rates for new members when you open a credit card account. However, it’s also possible for issuers to offer promotional interest rates to existing cardholders.

Recommended: How to Avoid Interest On a Credit Card

How Credit Card Promotional Interest Rates Work

One common scenario for how credit card promotional interest rates work is that an issuer might offer a 0% promotional interest rate on purchases and/or balance transfers for a certain period of time. When you’re using a credit card during the promotional interest period, you won’t pay any interest.

It’s important to note that there are two major types of promotional interest rates, and they vary slightly. With a 0% interest promotion, you won’t pay any interest during the promotional period. If there’s any balance remaining at the end of the promotional period, you’ll begin paying interest at that time. With a deferred interest promotional rate, on the other hand, you’ll pay interest on any outstanding balance back to the date of the initial purchase.

Benefits of Credit Card Promotional Rates

As you may have guessed, there are certainly upsides to taking advantage of credit card promotional interest rates. Here’s a look at the major benefits.

Low Interest Rate During the Promotional Period

One benefit of credit card promotional interest rates is the ability to take advantage of a low or even 0% interest rate during the promotional period. Having access to these promotional rates can give you added flexibility as you plan your financial future.

Ability to Make Balance Transfers

One possibility to maximize a credit card promotional rate is if you have existing consumer debt like a credit card balance. By using a balance transfer promotional interest rate, you can transfer your existing balance and save on interest. This can help lower the amount of time it takes to pay off your debt.

Can Pay For a Large Purchase Over Time

If your credit card has a 0% promotional interest rate on purchases, you can take advantage of that to pay for a large purchase over time. That way, you can spread out the cost of a large purchase over several months rather than needing to pay it off within one billing period.

Just make sure to pay your purchase off completely before the end of the promotional period to avoid paying any interest.

Drawbacks of Credit Card Promotional Rates

There are downsides to these offers to consider as well. Specifically, here are the drawbacks of credit card promotional interest rates.

Deferred Interest

You need to be careful if your credit card promotional rate is a deferred interest rate, rather than a 0% interest rate. Because of how credit cards work with a deferred interest rate promotion, you’ll pay interest on any outstanding balance at the end of the promotional period — back to the date of the initial purchase. This amount will get added to your existing balance, driving it higher.

Penalty Interest Rates

You still have to make the minimum monthly payment on your credit card during the promotional period. If you don’t make your regularly scheduled payment, the issuer may cancel your promotional interest rate. They may even impose an additional credit card penalty interest rate that’s higher than the standard interest rate on your card.

May Encourage Poor Spending Habits

Establishing good saving habits and living within your means is an important financial concept to live by. While it may not always be possible, it’s generally considered a good idea to save up your money before making a purchase. While a 0% interest promotional rate means you won’t pay any interest, it can contribute to a mindset of buying things you don’t truly need.

Recommended: Tips for Using a Credit Card Responsibly

How Long Do Credit Card Promotional Interest Rates Last?

By law, credit card promotional interest rates must last at least six months, but it is common for them to last longer. You may see introductory interest rates lasting 12 to 21 months, or even longer.

Regardless of how long your promotional period lasts, make sure you have a plan to pay your balance off in full by the end of it. Credit card purchase interest charges will kick in once your promotional period is over.

Zero Interest vs Deferred Interest Promotions

Both 0% interest rates and deferred interest rates are different kinds of promotional rates where you don’t pay any interest during the promotional period. However, they come with some key differences:

Zero Interest Deferred Interest
Often marketed with terms like “0% intro APR for 21 months”” Often marketed as “No interest if paid in full in 6 months”
No interest charged during the promotional period No interest charged during the promotional period
Interest charged on any outstanding balance starting at the end of the promotional period At the end of the promotional period, interest is charged on any outstanding balance, back-dated to the date of the initial purchase

What to Consider When Getting a Card With a Zero-Interest or Deferred Interest Promotion

One of the top credit card rules is to make sure you pay off your credit card balance in full, each and every month. But if you’re carrying a balance with a promotional credit card rate, you’ll want to make sure you understand if it’s a 0% rate or a deferred interest promotion.

With a 0% promotional rate, you’ll start paying interest on any balance at the end of the promo period. But with a deferred interest promotional rate, you’ll pay interest on any balance, back-dated to the date of the initial purchase.

In either case, the best option is to make sure that you have a plan in place to pay off the balance by the end of the promotional period.

Paying off Balances With Promotional Rates

You’ll want to have a gameplan for how to pay off your balance before the end of the promotional period. That’s because at the end of the promotional period, your credit card interest rate will increase significantly.

If you still are carrying a balance, you will have to start paying interest on the balance. And if you were under a deferred interest promotional rate, that interest will be calculated back from the initial date of purchase.

Watch Out for High Post-Promotional APRs

Using a 0% promotional interest rate can seem like an attractive option, but it can lull you into a false sense of financial security. You should always be aware that the 0% interest rate won’t last forever. Your interest rate will go up at the end of the promotional period, and if you’re still carrying a credit card balance, you’ll start paying interest on the balance.

Exploring Other Credit Card Options

There are some other credit card options besides getting a card with a promotional interest rate. For instance, you might look for a credit card that offers cash back or other credit card rewards with each purchase.

Before focusing on credit card rewards or cash back, however, you’ll want to make sure that you first focus on paying off your balance. Otherwise, the interest that you pay each month will more than offset any rewards you earn.

If you’re carrying a balance, you can also attempt to get a good credit card APR by making on-time payments and asking your issuer to lower your interest rate. By simply securing a good APR, you won’t have to worry about it expiring and then spiking like you would with a promotional APR.

The Takeaway

Some credit cards offer promotional interest rates to new and/or existing cardholders. These promotional interest rates could be a 0% interest rate for a specific period of time, or a lower interest rate to encourage balance transfers.

While taking advantage of promotional interest rates can be a savvy financial move if you have existing consumer debt or need to make a large purchase, you’ll want to make sure you have a plan to pay off your balance in full before the promotional period ends. That way, you avoid having to pay any interest.

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.

FAQ

Will my interest rate spike after a promotional deal ends?

Yes, generally credit card promotional interest rates last only for a specific number of months. The way credit cards work is to charge interest on balances that are not paid off. So, while your credit card may charge 0% or a lower promotional rate for a period of time, the interest rate will rise once the promotional period is over and will apply to any outstanding balance on the card.

How does promo APR work?

Promotional APR offers are generally put forward by credit card companies as a way to entice new applicants. Cards may offer a 0% introductory APR for a certain number of months on purchases and/or balance transfers. Once the promotional period is over, your interest rate will rise to its normal level.

Should you close a credit card with a high interest rate?

Having a credit card with a high interest rate will not negatively impact your credit or your finances if you’re not carrying a balance. So, simply having a high interest rate is not a reason, in and of itself, to close a credit card. But if you have a balance on a credit card with a high interest rate, you might want to consider doing a balance transfer to a card with a promotional 0% interest rate while you work to pay it off.

Is my credit card’s promotional rate too good to be true?

Promotional interest rates are a legitimate marketing strategy used by many credit card companies. While you shouldn’t treat them as a scam, you also need to make sure that you are aware of the terms of the promotional rate and how long the rate is good for. Make a plan to completely pay off your balance by the end of the promotional period before your interest rate increases.


Photo credit: iStock/Jakkapan Sookjaroen

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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Are Credit Card Rewards Taxable? Guide to Paying Taxes on Rewards

In some cases, the IRS (Internal Revenue Service) does consider credit card rewards taxable income and in some cases, they don’t tax earned rewards. Confused? Don’t worry: Read on to learn when credit card rewards are taxable income and when they aren’t.

What Are Credit Card Rewards?

To better understand how credit card rewards are taxed, it can help to know what credit card rewards are. When a consumer uses a credit card they may earn different credit card rewards, such as points, cash back, and airline miles.

Depending on their redemption value, these rewards can be worth up to hundreds if not thousands of dollars. Your cardholder agreement should outline the credit card rules for how to earn rewards using a specific credit card, as well as how to redeem them.

How the IRS Treats Credit Card Rewards

In some cases, credit card rewards are taxable; in other cases, no. Take a closer look at which types of rewards and in which scenarios credit card rewards are counted as taxable income by the IRS.

Rewards Treated as Rebates on Spending

Luckily, cash back rewards and other rewards like miles or points aren’t considered taxable income when earned by making purchases. The IRS considers these types of rewards as rebates, discounts, or bonuses rather than income.

The trick is that the cardholder has to spend a certain amount to earn a reward in order for the IRS to not classify the rewards as income. For example, if a new credit card offers $200 in cash back when the cardholder spends $2,000 within the first six months of opening their account, that $200 would not be considered taxable income.

Rewards Considered as Income

Certain rewards are considered income. The way to identify which rewards are taxable income is by looking at how they’re earned.

As mentioned previously, if someone spends money to earn rewards, those rewards won’t be taxed. If, however, someone is given a $150 gift card simply for signing up or referring a friend for a new credit card, that $150 is viewed as taxable income — because they didn’t spend any money to earn it.

When Are Credit Card Rewards Taxed?

Again, credit card rewards that aren’t earned through spending (such as some introductory bonuses) can count as income that the IRS will expect the cardholder to pay income taxes on. Some scenarios in which credit card rewards may get taxed include:

•   If you received a sign-up bonus simply for opening a credit card or account

•   If you earn a reward for referring a friend

When Your Credit Card Rewards Are Taxable

As briefly mentioned above, any monetary rewards that a cardholder didn’t earn through spending can be considered taxable income.

Let’s look at how this can work with two different credit card bonus offers. If a cardholder is offered $100 if they spend $1,500 in the first three months of having their account open and they spend enough to earn that bonus, that reward won’t count as taxable income. On the other hand, if a cardholder is offered a $100 gift card simply for opening their new account, they will need to pay income tax on the $100.

When Your Credit Card Rewards Are Not Taxable

As briefly mentioned above, credit card rewards aren’t considered taxable income if someone spends money to earn them. When a cardholder acquires the rewards (cash back, travel miles, etc.) through purchases, then those rewards are classified as a rebate or a bonus, not taxable income.

For instance, this may include:

•   Sign-up bonuses that require meeting a spending threshold

•   Rewards earned from credit card spending

•   Miles earned through travel

Are Business Credit Card Rewards Taxable?

It doesn’t matter if the rewards are earned with a personal credit card or a business credit card — the same rules surrounding income taxes apply.

Where business credit cards can affect taxes is when it comes time to take tax deductions. For example, if someone bought $2,000 worth of equipment for their business and earned $40 in cash back rewards doing so, they can only deduct $1,960 on their taxes. In other words, they can only deduct the net cost of business expenses, which cash back reduces.

How to Know If You Owe Taxes on Credit Card Rewards

It can be hard to keep track of how much taxes are owed on credit card rewards. If someone earns a bonus without having to meet a spending requirement, the credit card company might send the cardholder an IRS Form 1099: either a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned.

Whether or not you receive this form, however, you’ll need to report the bonus on your income taxes. To make doing this easier, it can be helpful to keep track of any bonuses not earned through spending. That way, if the credit card issuer doesn’t send a Form 1099-INT or Form 1099-MISC, you can still complete your taxes properly.

Reviewing old statements to look for statement credits in the form of cash back or other types of rewards can be helpful.

Recommended: How to Pay Taxes With a Credit Card

Avoiding Taxes on Your Credit Card Rewards: What to Know

To avoid taxes on credit card rewards, all the cardholder has to do is not seek out credit cards that offer bonuses for simply signing up for the credit card. If the rewards are earned through spending, they won’t run into any taxes, thus allowing them to pay less tax.

The Takeaway

In general, taxes only apply to rewards that don’t require any spending to earn. If you’ll owe taxes on your rewards, the credit card issuer typically will send a Form 1099-INT or Form 1099-MISC specifying the amount of income you’ve earned and will need to report.

Being smart about credit cards and their usage is about more than just rewards, however.

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.

FAQ

Are credit card cash back rewards taxable?

Only credit card rewards that cardholders receive without having to spend money to earn them in any way are considered taxable income. If a cardholder earns cash back for spending money using their credit card, it won’t count as taxable income.

Are loyalty points taxable?

If someone spends money to earn loyalty points (such as purchasing airline tickets), they won’t have to pay taxes on those points. If, however, they received the points simply for signing up for a credit card, that would count as taxable income that they’ll need to report.

Are credit card rewards reported to the IRS?

In some cases, yes, credit card rewards are reported to the IRS. When this happens, the credit card company might send the cardholder a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned that they’ll need to report.

Do you have to pay taxes on credit card rewards?

Cardholders need to pay income taxes on credit card rewards they didn’t need to spend money to earn. If they had to spend money to earn a reward, such as cash back, that won’t count as taxable income.


Photo credit: iStock/Grayscale Studio

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.

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.

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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