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You may know the basics of how credit cards work. You can use your card to buy something now and pay it off later. You can earn rewards on your purchases. You must pay your balance in full each month to avoid interest charges.
But credit cards can be deceptively complicated when you dive into the various terms, fees, and rules associated with them. Some may come with interest rates that change over time. Others come with perks you may not know about.
Here are 10 things many people don’t know about their credit cards.
1. Your interest rates can vary
Your card’s APR is the annualized interest rate charged on your credit card balance. It includes the interest rate itself, as well as any additional fees or charges.
Depending on the type of card, your credit score, and market conditions, interest rates can range anywhere from 0% to well into the double digits. The average credit card interest rate is 20.71% as of September 2023.
A higher interest rate means you’ll pay more interest charges if you carry a balance or make late payments.
Many credit cards offer introductory or promotional rates, often called “0% APR” or “introductory APR.” These rates are often lower or even 0% for a specific period, usually ranging from a few months to over a year. After the introductory period ends, the regular APR will apply.
If you plan to carry a balance or expect to use your credit card for larger purchases, opt for a card with a lower interest rate. Compare interest rates among different cards to find the option that aligns with your goals and spending habits.
2. Your card may cover lost or damaged items
Many credit cards offer purchase protection as one of their benefits.
Purchase protection can help you repair or replace items bought with your credit card. For example, if something you bought with your card is stolen, damaged, or lost within a certain period, your card may reimburse you. This can be particularly useful for expensive items like electronics or jewelry.
How much coverage you get depends on the card issuer and your specific card. Most credit cards also have a maximum amount of money you can claim for each incident and a lifetime maximum. For example, your card could cover you against damage and theft for up to 120 days, with a maximum benefit of $500 per claim and $50,000 per account.
3. Paying only the minimum can keep you in debt
It’s true that paying your credit card’s minimum payment each month avoids late fees. But you’ll still have to pay interest on the balance you didn’t pay, which can keep you in debt for years.
When you make the minimum payment on your credit card, you’re paying the smallest amount required by the lender each month. Most lenders structure this amount to cover the interest charges, plus a small percentage of your balance, between 1%-3%. This means only a small portion of your minimum payment is going towards reducing your principal balance.
You’re not doing much to reduce your debt by only making minimum payments. Your balance will continue to accrue interest and grow until you’ve paid your entire balance off. As a result, your overall debt takes longer to pay off, and you end up paying more in interest over time.
For example, let’s say you have a $5,000 credit card balance and an APR of 20%. Assuming your card’s minimum payment is 1% plus interest charges, if you only make your card’s minimum payment of $133.33, it will take you 277 months (over 23 years!) to pay off your debt. You’ll also pay almost $8,000 in interest — assuming you don’t make any new charges on your card.
Pay your balance in full each month to break free from this cycle. If you can’t do that, pay at least more than the minimum whenever possible.
Making larger payments reduces your balance faster, decreasing the total interest you’ll pay. This approach enables you to escape the clutches of debt quickly.
4. Your card can hurt (or help) your credit utilization ratio
Credit cards have a big impact on your credit utilization ratio, which plays a role in determining your credit score.
Your credit utilization ratio is the percentage of available credit compared to how much you’re currently using. It’s calculated by dividing your total credit card balance by your total credit limit.
If you have high credit card balances compared to your credit limits, it can hurt your credit score. It signals to lenders you’re having trouble managing your expenses.
A lower credit utilization ratio demonstrates responsible credit management and a lower risk of default. Creditors like to see that you’re using credit wisely and not relying heavily on borrowed funds.
To maintain a healthy credit utilization ratio, keep your credit card balances below 30% of your credit limit. For example, if you have a credit card with a $10,000 limit, it’s try to keep your balance below $3,000.
Paying your credit card bills on time and in full shows that you can manage credit effectively. You can also call your card issuer and ask for a credit limit increase, increasing your available credit and boosting your score.
5. Cash advances are extremely expensive
When you take out a cash advance, you’re essentially borrowing cash against your card’s credit limit. Unlike regular credit card purchases, cash advances often come with higher fees and interest rates.
Cash advance fees are often 2%-5% of the withdrawal amount, or even higher. For example, if you take a $500 cash advance with a 3% fee, you’ll immediately incur a $15 fee for the transaction.
Cash advance interest rates tend to be much higher than the interest rate for regular purchases. Interest on cash advances also starts accruing the moment you withdraw the funds, without any grace period.
These factors combined make cash advances an expensive way to access cash. It’s generally better to use your debit card for cash withdrawals or consider a personal loan, which may offer more favorable terms.
6. Sometimes the annual fee is worth it
With all the other fees credit cards charge, it doesn’t make sense to also pay an annual fee, right? Not necessarily.
Some credit cards offer generous rewards programs, such as cash back, travel points, or airline miles. These rewards can offset or exceed the annual fee if you use them effectively.
Premium credit cards often come with benefits like airport lounge access, concierge services, or hotel upgrades. These perks may be worth the added cost.
The Blue Cash Preferred® Card from American Express is a good example. This card has an introductory annual fee of $0 the first year and then charges $95 annually afterward. See rates and fees. But it also comes with lots of valuable perks that can easily cover the cost of this fee.
For example, this card offers 6% cash back at U.S. supermarkets (up to $6,000 annually, then 1%). If you spend $300 on groceries each month, you’ll earn $216 in cash back each year, well over the annual fee.
It’s really all about how you use the card and what’s important to you. Consider your priorities, compare different cards, and calculate the potential value of each card’s rewards program. If the benefits outweigh the costs and align with your financial goals, paying the annual fee can be a smart choice.
7. Your card may charge you for spending abroad
Foreign transaction fees are charged when you make a purchase in a foreign currency or outside your home country. This fee is often a percentage of the total transaction amount, between 1%-3%.
If you make a $1,000 purchase while traveling internationally and your credit card has a 2% foreign transaction fee, you would pay an additional $20 fee.
These fees can add up, especially if you frequently use your credit card for purchases while traveling or if you’re abroad for an extended period. They can impact your travel budget and tack on unnecessary expenses.
To avoid this, consider switching credit cards. Some cards specifically cater to travelers and don’t charge foreign transaction fees. The Bank of America® Travel Rewards credit card is one example.
8. Late payments can lead to even higher interest rates
When you fail to make your credit card payment on time, your card issuer may impose higher interest rates.
Penalty interest rates are often higher than your card’s regular interest rates, sometimes as high as 30%. They’re designed to be a deterrent and encourage borrowers to make timely payments.
When you’re hit with a penalty interest rate, it can have a big impact on your finances. Not only do you have to pay off your outstanding balance, but you’re also accruing interest at a higher rate, making it harder to get out of debt.
Late payments also cause your credit score to drop. They can stay on your credit report for years, making it harder to get credit in the future and affecting your ability to secure favorable interest rates or loan terms.
That’s why making your card payments on time is so important. Set up reminders, automate your payments, or establish a budgeting system to ensure you meet the due date.
9. Your card can help you get through airport security faster
Some cards reimburse you for programs like TSA PreCheck or Global Entry.
TSA PreCheck® allows travelers to keep their shoes and jackets on and avoid removing anything from their bags as they go through security. This can make the process much quicker.
Global Entry provides accelerated clearance for international travelers when entering the United States. It includes access to TSA PreCheck® benefits as well. With Global Entry, you can use automated kiosks to complete the immigration process, allowing faster entry into the country.
If you frequently travel internationally or within the United States, having a credit card that offers discounts to these security programs can enhance your travel experience and save you time at the airport.
10. A balance transfer credit card can save you money on interest
A balance transfer credit card allows you to consolidate your high-interest debt from other cards onto one card with a lower or 0% introductory interest rate.
By transferring your balances to a card with a lower rate, you can save a lot of money on interest charges. During the promotional period, which usually lasts several months to over a year, you won’t have to pay the high interest rates you were dealing with before. Instead, more of your payment will pay down the actual debt.
But keep in mind a few things when using a balance transfer credit card:
- Some cards may charge a fee for transferring your balances, typically a percentage of the amount being transferred. Make sure to factor in these fees when considering your potential savings.
- Take note of how long the promotional period lasts and what the interest rate will be once it ends. Compare the rates with other credit cards to ensure you’re getting a favorable deal.
- Approval for a balance transfer credit card and the terms you’ll receive often depend on your creditworthiness. Having a good credit score can help you secure better terms.
By using a balance transfer credit card smartly, with a clear plan to pay off your debt, you can save money on interest and work towards becoming free of debt.
The bottom line
Knowing the basics of how your card works is important, but educating yourself on your card’s perks and terms can save you time and money.
Be sure to read the fine print when applying for any card. It’s also smart to research the benefits and fees that come with any cards already in your wallet.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.