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Breaking Down Credit Card Basics: What You Don’t Know May Surprise You

March 14th, 2017 · No Comments · Credit Cards

by Kristy Welsh

(Last Updated On: August 15, 2017)

Breaking Down Credit Card Basics: What You Don't Know May Surprise YouYou don’t have to be a credit card novice to need a breakdown like this. As is the case with all sorts of things, it’s not uncommon to spend years doing things in a way that you could be doing better. The way you handle credit cards is no exception. Make sure you have the basics down when it comes to 1) applying for credit cards, 2) using them to build credit and repair bad credit, and 3) getting out of credit card debt once and for all.

1) Getting a credit card

Why you need one

In general, it’s a good idea to have a credit card to:

  • Help build and maintain good credit. It’s important to have a good credit mix, which should include both revolving credit (e.g., credit cards) and installment loans (e.g., auto loans, mortgages, student loans, personal loans).
  • Help repair bad credit. Granted, the worse your credit, the harder time you’ll have being approved for a credit card. But that’s what secured credit cards are for. Get one, use it responsibly, and watch your credit score improve.
  • Serve as a convenience. Though you never want to carry a credit card balance from one month to the next, there’s nothing wrong with charging something to your credit card that you don’t have the cash for today. Provided you’ll have the cash by the due date (so you can return the balance to zero), this is a nice convenience.
  • Help in emergency situations. Ideally, you have a $1,000 emergency fund built up to cover unforeseen circumstances. But if you don’t have that – or it’s just not enough – a credit card is a welcome relief. From car repairs to medical emergencies, it’s nice to have a credit card to use in a pinch. If it means carrying a balance for a while, so be it. Just make it a priority to pay it off as soon as you can.

When to think twice

As helpful as credit cards can be, they can also do more harm than good. Think twice about getting a credit card if:

  • You’ve recently applied for a lot of credit. Every time you apply for credit, it gets listed as a hard inquiry on your credit reports. Unfortunately, these not only put dents in your credit score, but don’t look good to creditors who see multiple credit applications within a short period of time as a big red flag. (The exception is multiple inquiries made within a window of 14 to 45 days when you are rate shopping for an auto loan, mortgage, or student loan.)
  • You’re carrying balances on credit cards you already have. The last thing you need is another credit card that could potentially get you even deeper into debt. Instead of applying for a new card, apply that effort to an aggressive payment plan on cards you already have.
  • You’re afraid you’re going to max it out (or you’re planning to). Having zero credit cards is preferable to getting one just to max it out. You’ll not only pay the price in the form of interest fees, but you’ll jack up your credit utilization ratio, which has a big impact on your credit score.

Where to look for credit card offers

As with any other product or service you want to use, it’s important to shop around for the best credit card offer you can find. Fortunately, you have plenty of resources.

Credit card comparison sites

Anyone can use the following sites to compare credit cards. However, if you sign up for their free credit monitoring, you will be shown offers specific to your credit reports and scores.

Your mailbox

This is not to say you should apply for these offers, as they’re probably not the best deals you can find. But it’s worth looking through what you get in the mail to familiarize yourself with what’s out there.

This strategy can be especially helpful if you’re trying to get one of your current credit card issuers to lower your interest rate or increase your credit limit. Call the credit card issuer, tell them you’re considering canceling the card you have with them and opening a new one with the better offer. You just might find they match it, or at least give you a better deal than the one you already have.

Choosing the right one

Type of credit card

The type of credit card you choose will depend on what you want to use it for and the benefits that matter most to you. Credit card comparison sites let you search by all sorts of categories, like:

  • 0% APR cards
  • Balance transfer cards
  • Travel and airline cards
  • Cash back cards
  • Rewards cards
  • Business cards
  • No foreign transaction fee cards
  • No annual fee cards
  • Low interest cards
  • Hotel cards
  • Gas cards
  • Student cards
  • Secured cards (if you have bad credit)

Level of credit needed to qualify

Some credit cards require better credit than others. So, if you don’t already know your credit score, find out so you can filter offers accordingly on credit card comparison sites.


Obviously, you want to keep credit card fees to a minimum. You may think some of these will never apply to you – like the late payment fee because you plan to always pay on time – but unforeseen circumstances happen. So, it’s a good idea to minimize fees across the board, just in case. That said, if you know you’re not planning to use the card for a balance transfer, or for spending when you’re out of the country, then those fees are naturally of no importance to you.

Credit Card Shopping? Compare These FeesFees to compare include:

  • Application fees (look for no application fee)
  • Annual fees (look for no annual fee)
  • Interest fees
  • Balance transfer fees
  • Cash advance fees
  • Foreign transaction fees
  • Late payment fees
  • Over-the-limit fees
  • Returned payment fees

What to expect from the credit check

Which credit bureau they use

When you apply for a credit card, expect the credit card issuer to check your credit with one or more of the big three credit bureaus – TransUnion, Experian, and Equifax.

Most credit card issuers will only pull one of your reports from one of the credit bureaus. Most issuers don’t use one bureau exclusively, so it’s impossible to say with certainty which bureau any one issuer will use for your application. There are a couple of exceptions, though. American Express pulls exclusively from Experian. And Capital One will pull your reports from all three bureaus.

To see which credit bureaus a credit card issuer uses most, check the Credit Pulls Database. Though this is only a list of credit pulls shared by database contributors, it will give you a good idea of which bureau(s) a specific issuer tends to pull most in your state.

Which scores they check

As for which credit score credit card issuers see, it depends on the credit scoring model they look at.

Ninety percent of the top lenders use the FICO Score, in which case you should expect them to see your base FICO Score, as well as the industry-specific Bankcard Score. Of course, that Bankcard can vary from one credit bureau to the next, not only because each of your credit reports may contain different information, but because each bureau uses different Bankcard Score versions:

  • Experian – FICO Bankcard Score 8 and 2 (as well as FICO Score 3)
  • Equifax – FICO Bankcard Score 8 and 5
  • TransUnion – FICO Bankcard Score 8 and 4

Of course, some lenders use VantageScore. This is a popular option for creditors who are deciding whether to extend credit to someone who doesn’t have a long enough credit history to have earned a FICO Score.

Learn more about the difference between FICO Score and VantageScore.

How it affects your credit

When a credit card issuer checks your credit, it counts as a hard inquiry which not only gets listed on your credit report, but can also knock points off your credit score. In most cases, it will be fewer than five points, but varies depending on your credit history. That’s why it’s so important to minimize your credit inquiries.

The exception is if you’re rate shopping for an auto loan, student loan, or mortgage. According to FICO, if you get all your rate shopping for an auto loan, student, or or mortgage done with a 14- to 45-day window, it will only count as one inquiry. (Window length varies depending on which FICO Score version is being used.) VantageScore has a similar policy — a rolling two-week window for auto loans, mortgages, and utility companies.

Fortunately, hard inquiries only stay on your credit reports for 2 years and stop counting toward your score after 12 months.

2) Using a credit card

Think twice about using credit card if you can't answer yes to these three questionsWhat to use it for

Ideally, you only want to use a credit card for things you:

  • Would be paying for anyway
  • Can pay off by the credit card due date
  • Can charge without exceeding 30 percent credit utilization ratio

Good examples are utility bills, cell phone bills, internet, gas, and groceries.

That said, there may be emergency circumstances for which these credit card rules go out the window. Car repairs, home repairs, and medical emergencies are good examples.

What’s generally not a good idea to charge to your credit card are expensive trips, clothes, furniture, or electronics that you haven’t budgeted for and have no plan for paying back anytime soon. That’s what savings accounts are for.

How often to use a credit card

There is no magic number for how often you should use your credit card. What matters most is regular use that doesn’t exceed 30 percent credit utilization, followed by in-full, on-time payments. Using it just once or twice a month should do the trick. What you don’t want to do is use it too infrequently, as this could get your card cancelled.

How much to charge

Many factors influence your credit score, and the percentage of available revolving credit you use is one of them. This applies to both FICO and VantageScores.

Most experts say to keep your credit utilization ratio under 30 percent. So, for example, if you have $1,000 in available credit on a card, you only want to use $300 at any one time. That means paying off that balance (or bringing it under $300) before using the card again.

Apply this same principle to all of your credit cards (as well as home equity lines of credit, which are also considered revolving credit accounts). Note, the credit utilization ratio does not apply to installment loans (e.g., auto loans, mortgages, student loans).

How much to pay on it

All of it, every time. That’s the goal, anyway.

Contrary to what you may have heard, carrying a credit card balance is not a good way to build your credit score. What does help is using your card and paying it off every month, proving you can handle credit responsibly. This not only does good things for your credit score, but also saves you money in interest fees. Provided you pay off your balance by your due date every month, finance charges do not apply.

3) Getting out of credit card debt

For current debt

Making a minimum payment every month may keep your credit card account in good standing. But that outstanding balance isn’t doing good things for your credit score or your bank account. Make it a priority to pay more than the minimum every month. If you have multiple credit cards to pay on, try the debt avalanche or snowball methods. And don’t use these credit cards until you’ve paid them off.

For past-due debt

Credit card issuers don’t charge-off accounts until they are 180 days past due. So, if your account isn’t that late yet, there is still time to make good on it. Yes, being late has already hurt your credit score, but a charge-off will hurt it a lot more.

If the debt is fewer than 90 days late, it’s probably still being handled by the credit card issuer. If it’s later than that, though, it may have been turned over to a collection agency. Either way, contact the appropriate company to work out a payment plan. (If you’re not sure whether it’s been turned over to a collection agency, call and ask the credit card issuer.) Just be sure to only agree to payments you know you can afford.

For charged-off debt

Just because a credit card issuer charges off a debt, it doesn’t mean you’re no longer liable for it. On the contrary, they’ll either still try collecting on it or they will sell it to someone else who will. Either way, it’s debt you are still legally obligated to pay (see DIY debt settlement techniques). You may not be sued for it, but you could. (The only exception is old zombie debt that has passed the statute of limitations. If someone is trying to collect that from you, send them this letter.) But before you pay a new debt collector a dime, request debt validation within 30 days of the initial notice. It’s then their responsibility to provide proof that 1) the debt exists, 2) it belongs to you, and 3) they have the right to collect on it.

Done right, credit cards are one of your best tools for building (and rebuilding) your credit. Done wrong, they’ll not only hurt your credit, but devastate your bank account. So, as difficult as it might be to adopt new credit card habits, it’s worth whatever time and effort it takes to do it right.


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