Credit cards can be a powerful tool for managing your finances, earning rewards and building credit – but they also come with responsibilities. Whether you’re a credit card pro or just starting, knowing how credit cards work can help you make smarter decisions. From how interest works to what happens if you close an account, here are some key credit card facts you should know before swiping.
MoneyLion can help you explore various credit card options tailored to different needs and preferences. Select why you need a credit card to get started:
17 Interesting facts about credit cards
Credit cards may seem straightforward, but a lot more is happening behind the scenes. Let’s dive into some lesser-known facts that could help you better understand your plastic.
1. You don’t need a perfect credit score to get a credit card
A perfect credit score isn’t required to get a credit card. In fact, there are credit cards designed specifically for people with less-than-stellar credit, such as secured credit cards or cards with higher interest rates. For example, someone with a score around 600 can still qualify for a credit card, though they may not get the most favorable terms.
2. Interest is charged on unpaid balances
If you don’t pay off your full credit card balance by the due date, interest will accrue on the remaining amount. This interest can add up quickly, especially if your card has a high APR (annual percentage rate), which can vary based on the card and economic factors. For example, if you have a $1,000 balance on a card with an 18% APR, you could pay an additional $180 over a year if you only make minimum payments.
3. Annual fees are common but not universal
Many credit cards have annual fees, especially those that offer rewards or travel perks. However, not all credit cards charge these fees. For example, travel cards might charge $95 per year but offer enough rewards to offset the cost, while other cards with basic features may not have any annual fees.
4. Cards help build a credit history if used responsibly
One of the biggest benefits of having a credit card is that it can help you build and improve your credit score. By using your card responsibly – meaning you pay off your balance on time and keep your credit utilization low – you can boost your credit history. A strong credit history can open doors to lower interest rates on future loans or even help you secure a mortgage.
5. Credit limits vary based on creditworthiness
Your credit limit – the maximum amount you can charge on your card – depends largely on your creditworthiness. You’re more likely to receive a higher credit limit if you have a high credit score and a strong credit history. Credit card issuers can increase or decrease your credit limit based on your payment history, income and overall credit behavior.
6. Having multiple credit cards isn’t always beneficial
While some people can manage multiple credit cards without any issues, for others, juggling several cards can lead to missed payments or overspending. Having multiple cards also makes it easier to accumulate debt if you’re not careful. For instance, if you have three credit cards with a combined credit limit of $10,000, it can be tempting to max out each one, which could hurt your credit score and lead to financial trouble.
7. Balance transfers can consolidate debt
A balance transfer allows you to move high-interest debt from one credit card to another with a lower interest rate, sometimes even 0% interest for an introductory period. This can help consolidate debt and reduce the amount you owe in interest, making it easier to pay off your balance faster.
8. Closing old credit cards hurts your score
Closing an old credit card might seem like a good idea, but it can hurt your credit score. When you close a card, you lose that line of credit, which increases your credit utilization ratio (the percentage of available credit you’re using). The length of your credit history is also shortened, which can negatively impact your score.
9. Some cards offer sign-up bonuses
Many credit cards offer generous sign-up bonuses, such as 50,000 points or $200 cash back, after you spend a certain amount within the first few months. Not everyone qualifies for these bonuses – if you’ve opened too many cards recently or your credit isn’t great, you might miss out on these lucrative offers.
10. Cash advances usually have higher interest rates
Taking a cash advance from your credit card can be tempting in an emergency, but it comes with higher interest rates than regular purchases. In most cases, cash advances also start accruing interest immediately, without the benefit of a grace period. For example, if you withdraw $500, you could pay significant interest, often around 24% or higher, on that amount right away.
11. Secured credit cards require a deposit
If you’re new to credit or trying to rebuild your credit score, secured credit cards can help. Unlike traditional credit cards, secured cards require you to deposit cash, which typically becomes your credit limit. For example, if you deposit $500, that’s the amount you can charge on the card. It’s a way for lenders to reduce their risk while allowing you to build or repair your credit.
12. Credit card accounts don’t expire
While your physical credit card will eventually expire and need replacement, the account itself doesn’t expire. Issuers can close your account if it’s inactive for an extended period or if they decide you’re no longer a good credit risk. Always monitor your accounts to ensure they remain open and in good standing.
13. Many credit cards offer rewards
Credit cards often come with rewards programs that allow you to earn points, miles and cash back on your purchases. For example, you might earn 1.5% cash back on every dollar spent and three points per dollar spent on travel and dining. These rewards can add up quickly and be redeemed for various perks.
14. You can upgrade or downgrade your credit card
If your financial needs or spending habits change, you may be able to upgrade or downgrade your credit card without applying for a new one. For example, if you’re not using the travel perks on your high-fee credit card, you can ask your issuer to downgrade you to a no-fee card with fewer benefits.
15. Some credit card terms can change suddenly
It’s not uncommon for credit card terms – like interest rates, fees and rewards programs – to change suddenly. Issuers must give you advance notice of these changes, but it’s always a good idea to stay on top of your credit card statements and read any notifications you receive.
16. Fraud protection typically included
Most credit cards come with built-in fraud protection, which means you’re not liable for unauthorized purchases made with your card. This feature gives you peace of mind knowing that you won’t be responsible for fraudulent charges if your card information is stolen.
17. A new card may impact your credit score
Applying for a new credit card can temporarily lower your credit score because it results in a hard inquiry on your credit report. Opening a new card affects your average account age, which can also lower your score. The positive effects of having more available credit can outweigh the initial dip if managed well.
Credit cards are powerful tools – use them wisely
Credit cards offer many benefits, from building credit to earning rewards, but they also come with responsibilities. By understanding how credit cards work, from interest rates to rewards programs, you can make informed decisions and use your card to improve your financial well-being.
FAQ
What is special about credit cards?
Credit cards offer convenience, rewards and the ability to build credit while providing fraud protection.
Is having a credit card good or bad?
It depends on how you use it – responsible use can build your credit, while overspending can lead to debt.
Can I transfer money from my credit card to my bank account?
Yes, but it’s often considered a cash advance, which usually comes with higher fees and interest rates.
What happens if you never use a credit card?
Your account could be closed due to inactivity, negatively affecting your credit score.
What happens if you never apply for a credit card?
You may miss out on opportunities to build credit and access rewards, but it also means avoiding potential debt.
