Secured credit and unsecured credit are types of credit that are very different in terms of risk to consumers and lenders.
In a Credit Countdown video on our YouTube channel, credit expert John Ulzheimer explains the benefits and drawbacks of each type of credit and how different types of credit can affect your credit score. Read what he has to say below and watch the video on our channel!
What Is Secured Credit?
Secured credit is a form of credit that is backed by some sort of physical asset as collateral. If the borrower defaults on a secured loan, the lender can take the asset in order to recoup the loss.
Examples of Secured Credit
When you take out an auto loan, the loan is secured by your vehicle. Technically, the lender is the owner of the car until you finish paying off the debt. If you fail to repay the loan as agreed, the lender can take back the car using the process of repossession.
Similarly, when you take out a mortgage, that loan is secured by your home, and the bank still “owns” the home until you pay it off. In this case, not paying your mortgage can lead to the bank foreclosing on your home, meaning that they evict you from the home and then can sell it to someone else.
Pawn shop loans and title loans are also examples of secured loans.
While most credit cards are typically unsecured, secured credit cards do exist for consumers who may not be able to qualify for unsecured credit cards due to bad credit or a lack of credit history. With a secured credit card, you make a security deposit that counts toward your credit limit that the lender can keep in the event that you are not able to make the required payments on your credit card.
Mortgage loans are secured by your home.
What Is Unsecured Credit?
Unsecured credit is credit that does not have a physical asset as collateral, so the lender cannot take back an asset if you default on the debt.
Examples of Unsecured Credit
A student loan is an example of an unsecured loan because there is no material asset that can be taken away if you do not pay your student loans. Student loans are used to pay for an education, and obviously, the lender cannot “take back” the education you have already received.
Credit cards are generally extensions of unsecured credit, except in the case of secured credit cards, as we described above.
Secured Credit Unsecured Credit
Auto loans Unsecured credit cards
Mortgage loans Student loans
Home equity lines of credit Unsecured personal loans
Secured credit cards Unsecured lines of credit
Motorcycle loans
Boat loans
Pawn shop loans
Title loans
The Impact of Secured and Unsecured Debt on Your Credit Score
Secured and unsecured accounts are treated equally by credit scoring models, according to John. You are not penalized or rewarded by credit scores based on your accounts being unsecured or secured.
Different types of accounts are still treated differently by credit scores due to other factors (e.g. credit cards are treated differently than installment loans), but this particular factor does not play a role.
Secured Credit Cards: Use Them Carefully
Secured credit card accounts are commonly used by consumers to establish credit or rebuild their credit after having bad credit. This is a valuable credit-building strategy, but you should be cautious about how much you spend on your secured credit card.
Why? Because secured credit cards often have very low credit limits. That means you can quickly get to a high utilization ratio on the account even from modest spending. For example, if your secured credit card has a credit limit of $500 and you spend $250, you already have a utilization ratio on that account of 50%.
Having heavily utilized credit card accounts can have a significant negative impact on your credit score, so if you’re trying to keep your credit score as high as possible, you’ll want to keep an eye on the balance of your secured credit card and not let it creep too high relative to your credit limit.
Credit cards are often vilified for their high interest rates, which can be very costly to consumers who carry a balance from month to month rather than paying off the full balance that was accrued. Credit expert John Ulzheimer believes that credit cards do not deserve the bad reputation they have earned.
In a Credit Countdown video on our YouTube channel, John explained why credit cards are not necessarily as bad as they are made out to be and how to use them responsibly without going into credit card debt.
Keep reading to learn more on this topic and watch the video below!
Credit Card APRs
It’s true that credit cards do have high interest rates compared to other forms of credit, even if you have a good credit score. For this reason, once you get into credit card debt, it can be a very deep hole to climb out of, because the interest charges keep adding to your total amount of debt.
However, as John points out in the video, no one forces you to open a credit card or go into credit card debt, so in his opinion, it seems unfair to blame the credit cards with high interest rates for actions that consumers choose to take.
If you choose instead to pay off your balance every month, then you do not have to pay interest on your purchase, so the APR of the card is irrelevant. Therefore, if you are going to use credit cards responsibly, then there is no need to choose a credit card based on its APR.
Always Pay Off Your Credit Cards in Full
The most important rule when it comes to using credit cards correctly is this:
Only charge as much as you can pay off in full every single month.
When you pay your bill in full each month, since you are not paying interest, it is essentially free to use credit cards. The exception to this is if your credit card has an annual fee, but for some consumers, the annual fee on some credit cards may be worth paying in order to reap the rewards offered by the card.
If you want to be a responsible user of credit cards, it is essential to pay off your balance in full every month rather than carrying a balance and paying interest.
Maintain a Low Balance-to-Limit Ratio
If you want to have a good credit score, it’s important to keep a low balance-to-limit ratio (also commonly called the credit utilization ratio). The closer your balance is to your credit limit, the fewer points you can earn toward your credit score.
Don’t take this to mean that you cannot use your credit card often or make large purchases with it. Just be aware that since a higher balance-to-limit ratio means a lower credit score, you may want to avoid doing anything to substantially increase your balance before you apply for a loan, especially a large loan, like a mortgage loan or an auto loan. Otherwise, you could end up with a higher interest rate that could cost you thousands of dollars in additional interest over the course of the loan.
Do Not Skip a Payment
Credit card issuers sometimes offer “skip a payment” programs that allow you to “skip” a payment for one month, especially around the holidays, when consumers may rely more on their credit cards.
John recommends never signing up for these programs because by skipping a payment, you are obviously opting not to pay in full that month. Since you are carrying the balance to the next month, you will be charged interest on the debt and you will have even more debt to pay back the next month.
Instead of skipping a payment, the more responsible thing to do is to go ahead and pay the statement in balance in full just as you normally would.
Conclusions
While credit cards may be risky in the wrong hands, responsible consumers do not need to forgo using them altogether. It is possible to benefit from using credit cards as a financial tool without going into debt or paying interest.
To that end, make sure you always pay your balance in full and maintain a low balance-to-limit ratio, and never skip a payment.
To hear from John directly, check out the video below. Follow our YouTube channel to see more of our Credit Countdown videos!
When you are paying for purchases, is it better to use a debit card or a credit card?
The answer depends on which features and advantages are important to you. In a Credit Countdown video, credit expert John Ulzheimer compares the pros and cons of credit cards and debit cards in regards to several different metrics, such as fraud protection and credit-building ability.
Read the article about this subject below and then catch the Credit Countdown video at the bottom of the page or on our YouTube channel.
The Basics: How Debit Cards and Credit Cards Work
Credit cards and debit cards may look very similar and feel similar when you make a purchase, but the two payment methods work completely differently.
A debit card is linked to your checking account. When you pay for something using a debit card, the money you spent is being debited directly from your bank account. In other words, you are using your own money to pay for the item immediately.
A credit card is, of course, a form of credit, meaning that you are borrowing someone else’s money. In this case, the credit card issuer is your lender. When you swipe a credit card, you are essentially borrowing money from the bank to pay for the purchase with the agreement that you will pay back the debt, plus any applicable interest charges and fees, later.
Credit cards are revolving credit accounts, which means you have the option to carry a balance from month to month while making only the required minimum payments instead of paying the full balance when you get the bill.
Fraud Protection
If a fraudster gets ahold of your card, which type offers better protection?
With a debit card, fraudulent purchases have already deducted the funds from your checking account, and it may be difficult to get your money back.
If your credit card is stolen, it’s the bank’s money that is directly at risk, not yours. Beyond that, credit cards generally have excellent fraud protection policies.
The Fair Credit Billing Act (FCBA) mandates that you, as a consumer, can only be held liable for a maximum of $50 in the event of credit card fraud. Even better, the major credit card networks all offer $0 fraud liability policies, which means nothing has to come out of your pocket if your credit card is used fraudulently.
Credit cards provide strong fraud protection policies to limit your liability if your credit card information gets stolen.
Credit Building
There’s no comparison when it comes to credit building: only credit cards can help you build a credit history. The credit card issuer reports your activity to the credit bureaus, allowing you to accumulate credit age and on-time payment history if you manage the account properly.
The credit limit of your credit card also contributes to your revolving utilization, which may help your credit score as long as there is not a high balance on the account.
Obviously, debit cards are not a form of credit because you are not borrowing money. Therefore, you do not make payments to a lender and so your activity is not reported to the credit bureaus. For this reason, debit cards do not show up on your credit reports and cannot help you build credit.
Spending Capacity (Buying Power)
The buying power of a debit card is limited by how much money you keep in your bank account. It’s not necessarily a good idea to keep a lot of money in your checking account, where it is likely earning very little interest compared to what you could earn by investing the funds elsewhere.
Credit cards, on the other hand, typically provide more buying power because you are only limited by the credit limit set by the credit card issuer, which may be quite generous if you have a decent credit score. Since you do not need to pay off the balance immediately, you do not have to worry about maintaining a large stash of cash in your bank account.
To boost your credit card spending capacity even more, try some of the tips in our article on increasing your credit limit.
Usability
Certain transactions require you to use a credit card or are much easier to complete with a credit card.
This includes many activities related to traveling, such as renting a car or paying for a hotel room. In addition, such businesses may place a temporary “hold” on your account, which is not as much of an issue when you have available credit on your credit card compared to having a hold placed on your checking account, which could cause other transactions to be declined.
Budgetary Control
This is the category where debit cards excel. If you struggle to control your spending and stay within a budget, it’s actually a good thing to have less buying power and no access to credit.
Credit cards, if used correctly, don’t require you to get into credit card debt in order to get the advantages of using a credit card. However, the higher spending limit and the ability to carry a balance can be powerful temptations to buy more than you can afford to pay off.
Summary
So, which payment method wins in your opinion? Use the table below to decide.
Debit Cards Credit Cards
Source Your bank account The credit card issuer
Fraud Protection Limited Strong
Credit-building Ability No Yes
Buying Power Limited to the balance of your bank account Limited by your credit limit
Usability Limited in some situations Widely accepted
Budgetary Control Yes No
Check out the Credit Countdown video with John Ulzheimer on our YouTube channel for more information about credit cards vs. debit cards!
Secured credit and unsecured credit are types of credit that are very different in terms of risk to consumers and lenders.
In a Credit Countdown video on our YouTube channel, credit expert John Ulzheimer explains the benefits and drawbacks of each type of credit and how different types of credit can affect your credit score. Read what he has to say below and watch the video on our channel!
What Is Secured Credit?
Secured credit is a form of credit that is backed by some sort of physical asset as collateral. If the borrower defaults on a secured loan, the lender can take the asset in order to recoup the loss.
Examples of Secured Credit
When you take out an auto loan, the loan is secured by your vehicle. Technically, the lender is the owner of the car until you finish paying off the debt. If you fail to repay the loan as agreed, the lender can take back the car using the process of repossession.
Similarly, when you take out a mortgage, that loan is secured by your home, and the bank still “owns” the home until you pay it off. In this case, not paying your mortgage can lead to the bank foreclosing on your home, meaning that they evict you from the home and then can sell it to someone else.
Pawn shop loans and title loans are also examples of secured loans.
While most credit cards are typically unsecured, secured credit cards do exist for consumers who may not be able to qualify for unsecured credit cards due to bad credit or a lack of credit history. With a secured credit card, you make a security deposit that counts toward your credit limit that the lender can keep in the event that you are not able to make the required payments on your credit card.
Mortgage loans are secured by your home.
What Is Unsecured Credit?
Unsecured credit is credit that does not have a physical asset as collateral, so the lender cannot take back an asset if you default on the debt.
Examples of Unsecured Credit
A student loan is an example of an unsecured loan because there is no material asset that can be taken away if you do not pay your student loans. Student loans are used to pay for an education, and obviously, the lender cannot “take back” the education you have already received.
Credit cards are generally extensions of unsecured credit, except in the case of secured credit cards, as we described above.
Secured Credit Unsecured Credit
Auto loans Unsecured credit cards
Mortgage loans Student loans
Home equity lines of credit Unsecured personal loans
Secured credit cards Unsecured lines of credit
Motorcycle loans
Boat loans
Pawn shop loans
Title loans
The Impact of Secured and Unsecured Debt on Your Credit Score
Secured and unsecured accounts are treated equally by credit scoring models, according to John. You are not penalized or rewarded by credit scores based on your accounts being unsecured or secured.
Different types of accounts are still treated differently by credit scores due to other factors (e.g. credit cards are treated differently than installment loans), but this particular factor does not play a role.
Secured Credit Cards: Use Them Carefully
Secured credit card accounts are commonly used by consumers to establish credit or rebuild their credit after having bad credit. This is a valuable credit-building strategy, but you should be cautious about how much you spend on your secured credit card.
Why? Because secured credit cards often have very low credit limits. That means you can quickly get to a high utilization ratio on the account even from modest spending. For example, if your secured credit card has a credit limit of $500 and you spend $250, you already have a utilization ratio on that account of 50%.
Having heavily utilized credit card accounts can have a significant negative impact on your credit score, so if you’re trying to keep your credit score as high as possible, you’ll want to keep an eye on the balance of your secured credit card and not let it creep too high relative to your credit limit.
The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I need some advice in regards to my credit report and good ways that I can begin to build up my credit. I have no credit at all. Eventually within five years once I’m out of school I want to buy a house.
Building credit from scratch will take some time and effort, just like getting a job after graduating from school. You can think about good credit as a means to an end: you need good credit to finance big purchases and get the best interest rates and repayment terms on loans and mortgages. So, getting your credit ready is an excellent start to buying a home in the near future.
What is on Your Credit Report?
Your credit is a record of your monthly financial credit transactions. Your creditors report your activity to the three credit bureaus, Equifax, Experian, and TransUnion, and they use that data to generate a credit score. Your credit report also includes your personally identifying information such as your name, addresses, social security, and some public records such as bankruptcies and judgments and tax liens, if you have any. To start generating data for your credit report, you need to get a credit line. The easiest way to do that is to get a secured credit card. Many banking institutions issue secured credit cards, and they work pretty much like a regular credit card. The main difference is that these cards are backed by a cash deposit, which usually corresponds to the card’s credit limit.
Be Strategic
Learning how to use your credit card strategically is equally as important as getting that credit line. Your credit score takes into consideration several factors. The factor that influences your score the most is whether you pay your accounts on time and as agreed. Late or insufficient payments are very detrimental to your credit history. So, you should plan to pay in full and before your due date. Another important factor is your utilization ratio, which is how much you owe compared to your available credit. To have a balanced ratio, experts recommend that you use only 30% or less of your available credit in every billing cycle. For instance, if you have a $500 credit limit, you should be using less than $150.
Yet another factor is the age of your credit history. The older your credit history, the more history and data you’ll have to establish a solid credit history. Achieving this will just require time and your continued effort. The other two factors to keep in mind are the mix of credit you have (credit cards and loans) and how often you ask for new credit. Too many new credit inquiries reflect negatively on your score, so it’s important that you only apply for new credit sporadically. In your case, you should keep your secured credit card for at least a year before applying for a regular credit card. In some cases, your creditor may even upgrade your secured credit card to a regular one and return your cash deposit.
It’s never too soon to start building your credit. And once you learn healthy credit management habits, it will be very easy for you to manage your credit and use your credit cards responsibly on a daily basis. If you feel you need additional guidance or personalized help to get you started, you can always reach out to an NFCC Certified Financial Counselor. They are ready to help over the phone, online, and in-person if it’s available in your state. Good luck!
Credit cards are not only a useful payment method for making purchases but also an essential component of a solid credit-building strategy.
After all, credit cards are the most common form of revolving credit, which is given more importance than installment credit (e.g. auto loans, student loans, mortgages, etc.) when it comes to calculating your credit score.
Unfortunately, credit cards often get a bad rap because it’s easy to rack up excessive amounts of debt and destroy your credit score if you do not know how to use credit cards properly.
However, when you have the knowledge and ability to use credit cards to your advantage rather than to your detriment, they can be an extremely powerful financial tool to have in your arsenal.
If you’re unsure if using credit cards is the right choice for you or confused about how they work, then keep reading to learn the basics of credit cards that everyone should know.
What Is a Credit Card?
A credit card is a card issued by a lender that allows a consumer to borrow money from the lender in order to pay for purchases.
The consumer must later pay back the funds in addition to any applicable interest charges or other fees.
They can choose to either pay back the full amount borrowed by the due date, in which case no interest will be charged, or they can pay off the debt over a longer period of time, in which case interest will generally accrue on the unpaid balance.
Each credit card has an account number, a security code, and an expiration date, as well as a magnetic stripe, a signature panel, and a hologram. Most credit cards also now have a chip to be inserted into a chip reader rather than swiping the card at the point of sale. In addition, some credit cards offer contactless payment capability.
Credit cards allow consumers to pay for goods and services with funds borrowed from the credit card issuer.
How Do Credit Cards Work?
Although using credit cards may feel like using “fake money” or spending someone else’s money, it’s important to understand that the money you borrow when you pay with a credit card is very much real money that you now owe to the lender.
Credit Cards Are Unsecured Revolving Debt
With most credit cards, the funds you borrow are considered to be unsecured debt because you are borrowing the money without any collateral. That means the credit card issuer is taking on additional risk by giving you a credit card, since there is no collateral that they can take from you if you fail to pay back the debt, unlike with secured debt, such as a mortgage or a car loan.
Furthermore, the lender allows you to decide when and how much you want to pay back the funds instead of requiring you to pay the full balance on each due date. You can choose to only pay the minimum payment and “revolve” the remaining balance from month to month, which extends the amount of time during which you owe money to the credit card company.
Most credit cards now come with a chip in addition to a magnetic stripe.
For the above reasons, credit card interest rates are typically significantly higher than the interest rates for installment loans.
However, credit cards are also the only form of credit where paying interest is optional—there is a “grace period” of at least 21 days before the interest rate for new purchases takes effect, and you only get charged interest if you do not pay back your full statement balance by the due date.
(Keep in mind that the grace period usually only applies to new purchases, as stated by The Balance. This does not include balance transfers or cash advances, which typically begin accruing interest immediately.)
Understanding Credit Card Interest Rates
To reiterate, the interest rate of a credit card technically only applies when you carry a balance instead of paying off your full statement balance each month. However, most people will likely end up carrying a balance on one or more credit cards at some point, so it is still a good idea to be aware of what your interest rates are.
APR and ADPR
The interest rate of a credit card is usually expressed as an annual percentage rate (APR). This is the percentage that you would pay in interest over a year, which can be confusing because interest on credit card purchases is charged on a daily basis when you carry a balance from month to month.
You can find your average daily periodic rate (ADPR), which is the interest rate that you are being charged each day, by dividing the APR of your card by 365.
Average Credit Card Interest Rates
The interest rate of a credit card, expressed as the APR, is important to know if you ever carry a balance on the card.
As of October 2020, the average credit card interest rate as reported by The Balance is 20.23%. However, credit card issuers are allowed to set their APRs as high as 29.99%. It is not uncommon to see APRs upwards of 20%, even for consumers who have good credit.
The highest interest rates are generally seen on credit cards for bad credit or penalty rates that credit card issuers can implement when you are 30 or more days late to make a payment. You may also get penalized with a higher interest rate if you go over your credit limit or default on a different account with the same bank, according to ValuePenguin.
Ask for a Lower Interest Rate
In our article on easy credit hacks that actually work, we suggest trying the simple tactic of calling your credit card issuer’s customer service department and asking for a lower APR. Surveys have shown that a majority of consumers who do this are successful in obtaining a lower interest rate.
Important Dates to Know
Many consumers assume that the payment due date of your credit card is the only important date you need to worry about. While it’s true that the due date is the most important date to be aware of, there are several other dates that are useful to pay attention to as well.
Billing cycle
The billing cycle of a credit card is the length of time that passes between one billing statement and the next. All of the purchases you make within one billing cycle are grouped together in the following billing statement.
This cycle is typically around 30 days long, or approximately monthly, although credit card companies can choose to use a different billing cycle system.
Statement closing date
Your credit card’s statement closing date is not the same thing as your due date, so make sure you know both.
Sometimes referred to simply as the “closing date,” this is the final day of your billing cycle. Once a billing cycle closes and the statement for that cycle is generated, the balance of your account at that time is then reported to the credit bureaus.
You can look at your billing statement to find the closing date for your account. Because of the 21-day grace period, the statement closing date is usually around 21 days before your due date.
Due Date
This is the most important date to know in order to pay your bill on time every month, which is the most influential factor when it comes to building a good credit history. To make it easy for yourself to avoid accidental missed payments, you may want to set up automatic bill payments.
If your due date is inconvenient due to the timing of your income and other bills, you can try requesting a different due date with your credit card issuer.
Promotional offer dates
Many credit cards offer introductory promotions to attract new customers, such as 0% APR, bonus rewards, or no balance transfer fees. To use these offers strategically, you will need to know when the promotional period ends so you can plan accordingly.
Expiration date
All credit cards have an expiration date past which they cannot be used.
Every credit card has an expiration date printed on it, after which you will no longer be able to use that card, although your account will still be open. You just have to get a new credit card sent to you to replace the one that is expiring.
Usually, credit card companies will automatically send you a new card before the original card expires. If this does not happen, simply call the issuer to ask for a replacement credit card.
A Common Credit Card Mistake
Some consumers think that the closing date and the due date are the same thing and therefore believe that if they pay off the full statement balance by the due date, the credit card will report as having a 0% utilization ratio. They may then be confused to find out that their credit card is still reporting a balance to the credit bureaus every month.
However, the statement closing date is usually not the same date as your due date. This is why your credit cards may report a balance every month even if you always pay your bill in full—the account balance is being recorded on your statement date before you have paid off the card.
If you do not want your credit card to report a balance to the credit bureaus, you will need to either pay off the balance early, prior to the statement closing date, or pay your statement balance on the due date as usual and then not make any more purchases with your card until the next closing date.
Credit Card Payments
With credit cards, you have several different options for payment amounts.
Minimum payment
If you only pay the minimum payments on your credit cards, it will take longer to pay off your credit card debt and you will be charged interest.
This is the minimum amount that you are required to pay by your due date in order to be considered current on the account and avoid late fees. Although this may vary between different credit card issuers, typically the minimum payment is calculated as a percentage of your balance.
If you make only the minimum payment every month, it will take you a much longer time to pay off your balance and you will be paying a far greater amount in interest than if you were to pay off your statement balance in full. Check your billing statement to see how the math works out; the credit card company is required to disclose how long it will take to pay off the balance if you only make the minimum payments.
Statement balance
This is the sum of all of your charges from the preceding billing cycle in addition to whatever balance may have already been on the card before that cycle. This is the amount you need to pay if you do not want to pay interest for carrying a balance.
Current balance
This number is the total balance currently on your credit card, including charges made during the billing cycle that you are currently in, so it will be higher than your statement balance if you have made more purchases or transfers since your last closing date. You can pay this amount if you want to completely pay off your account so that it has no balance.
Other amount
You can also make a payment in the amount of your choosing, as long as it is greater than the minimum payment. This is a good option to use if you don’t have enough cash to pay the statement balance in full, but want to pay more than the minimum in order to mitigate the amount of interest you will be charged.
Credit Card Fees
Credit cards often charge various other fees in addition to interest. Here are some common fees to be aware of.
Although you may have access to a “cash advance” credit limit on your credit cards, it is generally not recommended to get a cash advance due to the high interest rates and fees you will have to pay.
Late payment fees
If you do not make the required minimum payment before the due date, the credit card company will likely charge you a late fee somewhere in the range of $25 – $40 (in addition to potentially raising your APR to a penalty rate). If you usually pay on time but accidentally miss a payment for whatever reason, try calling your credit card issuer and asking if they would be willing to reverse the fee since you have been an upstanding customer overall.
Annual fees
Some credit cards charge an annual fee for keeping your account open. Many times this charge may be waived for your first year as a promotional offer to attract new customers. Cards with higher annual fees will often have additional perks and rewards, but there are also plenty of great options for rewards cards that do not charge annual fees.
Cash advance fees
Your credit cards may give you the option to borrow cash in the form of a cash advance. However, this is usually not advised because cash advance interest rates are often significantly higher than your regular interest rate for purchases. In addition, you will most likely be charged a cash advance fee when you first withdraw the money, whether a flat dollar amount of around $10 or a percentage of the amount you take out, such as 5%.
Foreign transaction fees
Some cards charge a fee to use your card to pay for things in other countries. These fees are typically around 3% of the purchase amount. However, there are many credit cards on the market that do not charge foreign transaction fees.
Be sure to check the terms of service of your credit cards for fees such as these so that you can avoid any unexpected charges.
How Credit Cards Affect Your Credit
Credit cards are one of the most impactful influences on your overall credit standing, and they play a role in multiple credit scoring factors.
Building Credit With Credit Cards
One of the major advantages of credit cards is that it allows you to start building a history of on-time payments, which is extremely important given that payment history is the biggest component of your FICO score, making up 35% of it.
All you have to do to get this benefit is use your credit card every so often and pay your bill on time every month.
Click on the infographic to see the full-sized version!
Revolving accounts such as credit cards can have a much greater influence on your credit than auto loans, student loans, and even a mortgage—for better or for worse. They must be managed properly because negative credit card accounts will also have a very strong impact on your credit.
Mix of Credit
Although your mix of credit only makes up 10% of your FICO score, it is still worth considering, especially if you aim to achieve a high credit score or even a perfect 850 credit score.
A good credit mix generally includes various types of accounts, including both revolving and installment accounts. You can see the different types of accounts in our credit mix infographic.
Credit cards may help with your credit mix if you have a thin file or if you primarily have installment loans on your credit report.
They also add to the number of accounts you have, which is a good thing for the average consumer. In fact, as we talked about in How to Get an 850 Credit Score, FICO has stated that those who have high FICO scores have an average of seven credit card accounts in their credit files, whether open or closed.
The Importance of Credit Utilization Ratios
Your credit utilization is the second most important piece of your credit score, which is another reason why credit cards are such a strong influence on your credit.
The basic rule of thumb with credit utilization ratios is to try to keep them as low as possible (both overall and individual utilization ratios), meaning you only use a small portion of your available credit. Ideally, it’s best to aim to stay under 20% or even 10% utilization, because the higher your utilization rate is, the more it will hurt your credit instead of help.
Conclusions on Credit Card Basics
Credit cards can be intimidating, especially when you don’t know how to use them correctly.
It is also true that not everyone wants or needs to use credit cards.
It’s not impossible to build credit without a credit card, but it is more difficult since you would be limited to primarily installment loans, which are not weighed as heavily as revolving accounts, and possibly alternative credit data.
However, for those who are able to use credit cards responsibly and follow good credit practices, they can be an incredibly useful credit-building tool as well as a way to reap some benefits and perks that other payment methods do not provide.
We hope this introductory guide to credit cards provides the knowledge base you need in order to feel confident using credit cards and to take advantage of their benefits.
If you found this article useful, please comment to let us know or share it with others who want to learn more about credit cards!
Balance transfers are a somewhat controversial topic in the world of credit repair and debt payoff.
They can be a wonderful tool for helping consumers get out of credit card debt without being crushed by sky-high interest rates. On the other hand, if you’re not careful, they can also enable you to get yourself even deeper into debt than you were before.
If you’re interested in learning more about how balance transfers work, the pros and cons of balance transfers, and whether or not one could benefit your credit, then look no further: this article contains everything you need to know about balance transfers.
What Is a Balance Transfer?
A balance transfer is exactly what it sounds like: it is the process of transferring a balance from one credit card to another, typically one with a lower interest rate. By transferring your balance from a higher-interest card to a lower-interest card, you can save money on interest while paying down your debt.
Essentially, it’s kind of like using the lower-interest credit card to pay off the higher-interest card.
If you carry a credit card balance from time to time, you may have received from balance transfer offers in the mail from various credit card issuers, eager for you to apply for their credit card and transfer your debt to it. And you may have wondered, what’s in it for the banks? Why do they want to take on debt that you have with another bank?
A balance transfer is a way for a bank to get you—and your debt—to switch over to them from a competitor. To incentivize you to do this, they may offer a great deal on your balance transfer, such as 0% interest on your balance for 18 months.
Of course, the bank doesn’t make any money when you are not paying interest, so what are they gaining from this?
Firstly, the banks charge a small fee for each balance transfer (typically around 3% – 5%; more on this below). They also earn money on transaction fees when you swipe your card if you make purchases with the new card.
In addition, the bank is hoping that they will eventually be able to make money off of you in one or more of these scenarios:
You still have a balance left on the account when the promotional low-interest offer ends, and they can then begin to charge you a higher interest rate on the remaining balance. You make purchases with the card, which they can charge the normal interest rate interest on, and which makes it more likely that you will still have a balance at the end of the introductory period. You miss a payment for two months in a row and get a 60-day late on the account, which allows the bank to increase your interest rate to a high penalty APR of up to 29.99%.
If you make any of the above mistakes, then your account suddenly becomes very profitable for the bank instead of interest-free credit for you.
If you miss a payment for 60 days, your credit card issuer can bump up the APR from 0% to a high penalty rate.
The banks know that a certain percentage of customers will ultimately end up generating profit for them, which means that offering balance transfers is an effective marketing tool even if some customers “beat the system” by paying off their entire balance without paying a cent of interest.
If you’re smart about making a plan to avoid potential pitfalls, you may be able to save yourself a lot of money and pay down your debt faster by using a balance transfer to your advantage.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a credit card that has terms that were specifically designed to encourage customers to transfer a balance to the card. It can still be used for purchases, just like a normal credit card (although that’s usually not a good idea, as we’ll explain later on), but its primary purpose is for balance transfers.
What Is a Good Balance Transfer Credit Card?
A good balance transfer credit card is any card that offers a low balance transfer fee and an introductory period during which there is a low APR or, ideally, no interest charged at all.
In addition, in the interest of minimizing costs, you’ll probably want to look for cards that do not charge an annual fee.
To summarize, the perfect balance transfer credit card would ideally have the following three things:
0% introductory APR for at least 12 – 18 months 0% introductory balance transfer fee No annual fee
However, it is more typical to find cards that have a combination of two out of the three. For example, you might apply for a balance transfer card that has a 0% APR for 18 months and no annual fee but a 3% balance transfer fee.
Some balance transfer credit cards may also double as reward cards that offer cash back or rewards points on purchases. While this might be a nice feature to have down the road, it’s best to avoid making purchases on your new balance transfer card while you pay off the balance. The promotional balance transfer APR usually doesn’t apply to purchases, which means they will begin to accumulate interest at the regular rate immediately.
Although some balance transfer credit cards may also offer cash back rewards, it’s best to avoid using them for purchases until you have finished paying off your balance.
Plus, the credit card company can choose to apply your payments first to the balance you transferred, instead of new purchases, so it’s possible that interest on those charges could keep racking up until you are finished paying off your entire balance transfer.
Which Balance Transfer Card is Best?
For specific credit cards that are good for balance transfers, you can browse online resources, such as Credit Karma’s list of the best balance transfer cards. Creditcards.com and NerdWallet have similar roundups of their favorite balance transfer cards.
Compare and contrast the terms for each card you are interested in to find the best balance transfer deal. Many resources also estimate what credit score range you may need in order to get approved for different cards.
Using an Existing Card for a Balance Transfer
You don’t necessarily have to apply for a new credit card in order to transfer a balance—you may already have a credit card that you could use for a balance transfer. Sometimes banks will offer balance transfer promotions with 0% APR to their existing customers, so keep an eye out for any balance transfer deals from your credit card issuers.
You could even consider potentially transferring a balance to another credit card without any sort of promotional offer if it already has a significantly lower interest rate.
How Does a Balance Transfer Work?
When you apply for a new balance transfer credit card or accept a promotional balance transfer offer with an existing card, you provide information about the account you want to transfer a balance from.
Alternatively, if you are applying for a new card, you could wait and see what credit limit you are approved for first, and then contact the issuer of your new card to set up a balance transfer.
Once you have been approved for the new card (if applicable) and submitted your balance transfer information, the issuer of the card you are transferring a balance to will contact the other bank in order to pay your balance.
It may take a few weeks for the transfer to be completed. In the meantime, you will need to keep making payments on your existing account as usual so that you don’t miss a payment while waiting for the balance to be transferred. Once the transfer has gone through, then you can start making payments toward the new account.
What Is a Balance Transfer Fee?
Most credit card issuers will charge a fee for conducting a balance transfer. This fee is a certain percentage of the balance you are transferring. Typically, balance transfer fees range from 3% to 5%. They may also have a minimum fee of around $5 to $10 that is assessed for smaller balances.
For example, if you want to transfer $5,000 and the balance transfer fee is 5%, then you would be charged $250 for the balance transfer ($5,000 x 0.05 = $250).
Your credit card issuer may supply you with balance transfer checks, which you can use to pay off the balance on your higher-interest credit card.
You pay the balance transfer fee to the bank that provides the credit card that you are transferring the balance to. The bank will simply add the fee to your balance. In the above example, when your balance transfer is complete, you would end up with a balance of $5,250 on the account.
What Is a Balance Transfer Check?
If you regularly carry a balance on your credit cards from month to month, then you may have seen balance transfer checks before. Credit card issuers often send them in the mail along with a promotional balance transfer offer.
Balance transfer checks are checks that the issuer of your balance transfer credit card may supply to you which you can then use to pay off the balance that you want to transfer from another card. To do so, you would simply make out the check to the credit card company you want to pay for the amount you want to transfer.
Some banks may allow you to write the checks to yourself and deposit the money directly into your bank account, which you can then use to pay another credit card company. If this option is available to you, before rushing out and cashing the checks in your name, first check to see whether the credit card issuer will consider it a cash advance, in which case you would likely get charged a cash advance fee as well as a higher interest rate on the balance.
Can You Transfer a Balance Online?
While using balance transfer checks is one way to complete a balance transfer, it is often easier and faster to complete the process online or over the phone.
If you apply for a balance transfer card online, it is likely that you will have the chance to provide the account information for the account you’d like to transfer a balance from so that your new credit card company can make the payment for you.
You can request a balance transfer online as part of your application for a new balance transfer credit card.
Alternatively, you can call your new credit card issuer and provide the necessary information to complete the balance transfer over the phone.
Can You Transfer a Balance Between Products From the Same Bank?
You can usually transfer a balance between most banks, and you can sometimes even transfer other types of balances, such as installment loan debt, to a credit card.
Typically, however, credit card issuers will not allow you to transfer balances between different credit cards you have with the same issuer, including branded cards that are issued by the same bank.
For example, if you have two different credit cards with Chase, you likely wouldn’t be able to transfer a balance from one to the other. However, you could transfer your balance from your Chase card to, say, a Bank of America or Discover credit card.
The reason for this is that the banks are trying to use balance transfers as an incentive to gain new customers, which equate to new sources of revenue. An existing customer transferring a balance between two cards with the same bank doesn’t create any profit for the bank, so they have nothing to gain by offering balance transfers between their own credit cards held by current customers.
What Types of Debt Can You Transfer to a Balance Transfer Card?
Some credit card issuers may allow you to transfer other types of debt, such as installment loans.
Other types of debt that you may be able to transfer to a balance transfer credit card include student loans, personal loans, home equity loans, and auto loans. NerdWallet has a detailed list of the types of transfers that are accepted by several major credit card issuers.
Since installment loans typically have significantly lower interest rates than credit cards, it usually only makes sense to transfer installment debt to a credit card if you are confident in your ability to pay it off while you still have 0% interest on balance transfers.
What Is a Balance Transfer Credit Limit?
When you get approved for a balance transfer credit card, the card issuer will assign you a credit limit, which is the maximum amount of credit that you can carry on the card. Often, the amount that is available for balance transfers may either be the same as your total credit limit, meaning you can use your entire credit limit for balance transfers.
Other times, the credit card company may impose a separate balance transfer credit limit, which is the maximum amount of credit that you can use for balance transfers.
The balance transfer credit limit is not an additional amount that can be added on top of the total credit limit; rather, it is a specific portion of your total credit limit that can be used for transfers.
For example, if you get approved for a card that has a $5000 credit limit and a $4,000 credit limit, that means you can use $4,000 of the $5,000 of available credit for balance transfers. If you use the full balance transfer credit limit, after that, there will be $1,000 of your credit limit remaining, which will only be available for purchases.
It’s important to remember that balance transfer fees count toward your credit limit, so unless you find a card with no balance transfer fees, you won’t be able to transfer the full amount of your credit limit.
Therefore, you should calculate the total amount of the fees you will be charged before transferring to make sure you are staying below your credit limit. As an example, if your balance transfer credit limit is $10,000 and the balance transfer fee is 3%, that means you should transfer a balance of no more than $9,700 to leave room in your credit limit for the $300 fee ($10,000 x 0.03 = $300).
Although there is no hard limit on how many balance transfers you can do, it’s usually recommended to transfer a balance no more than once or twice.
How Many Balance Transfers Can You Do?
When it comes to the number of balance transfers allowed on one card, it depends on the policy of your balance transfer card issuer. For example, they may limit you to a maximum of three balance transfers when applying for the card, in addition to keeping the total amount transferred under your balance transfer credit limit.
More generally, in theory, you could do as many balance transfers as you like. In reality, of course, transferring a balance several times isn’t the best idea.
Having a lot of balance transfers on your record might lead creditors to assume that you don’t intend to or aren’t able to pay back your credit card debt quickly and that you are just transferring your debt between different credit cards to avoid paying interest, according to Discover.
Eventually, creditors might stop approving you for balance transfer cards, leaving you with a high interest rate when your promotional APR expires.
Plus, transferring a balance multiple times before paying it off might make you feel like you are making progress, when you are really just moving your debt around from one card to another without implementing an effective plan to pay it off.
Instead of falling into a cycle of endless balance transfers, which won’t help you pay off your debt, make sure you have stopped the cycle of spending that may have gotten you into debt in the first place and ask yourself whether you can create a plan to feasibly pay off your debt after your first balance transfer.
Will a Balance Transfer Close My Account?
If you are wondering whether the account that you transferred a balance out of will be closed after the balance transfer is complete, rest assured that it will not. The only thing that will happen is the balance of that account will decrease by the amount of the transfer.
Closing your credit card account is up to you. If you would like to close your account once there is no longer a balance on it, then you can contact your credit card issuer and request for them to close your account. You may want to close the account if it has an annual fee or if you think that having no balance on the account might encourage you to max it out again.
A balance transfer will not automatically close your old account. In fact, you should keep the old card open and in good standing so that it can help your credit utilization ratio.
However, unless you have a strong reason to close the account, such as the examples above, then it is typically recommended that you leave the account open.
As you may know from our article on how closed accounts affect your credit, the main reason that keeping accounts open is preferable is that they can only help your revolving credit utilization ratio when they are open. By closing an account, you take away the credit limit of that account from your utilization ratio, thus increasing your overall credit utilization.
So if you want to help out your credit score by maintaining a low credit utilization ratio, consider keeping the account open after the balance transfer. You don’t have to spend a lot on the card to keep it open.
Instead, you can charge something small every few months or use it for a recurring subscription service charge and simply pay it off when the bill is due. Even better, set up automatic bill pay so you don’t have to worry about remembering to pay the bill, which is a great credit hack!
How Much Does a Balance Transfer Cost?
To determine the cost of a balance transfer, all you have to do is simply multiply the amount of debt that you want to transfer by the balance transfer fee that your credit card issuer will charge.
For example, if you plan to transfer a balance of $8,000 and the balance transfer fee that will be assessed is 5%, then the fee associated with your balance transfer will cost you $400 ($8,000 x 0.05 = $400).
This amount would be added to the balance of the account that you are transferring to for a total new balance of $8,400.
However, the cost of a balance transfer may not be limited to the balance transfer fee. It is important to consider the interest that will be charged on your balance transfer as well.
If you can take advantage of a promotional 0% interest rate, then, obviously, you do not have to worry about interest charges as long as you pay off the balance by the end of the promotional period.
On the other hand, if you think you do not think that you will have finished paying off the balance by the end of the promotional period, then you should take into account the interest that will be applied once the time is up.
Some balance transfer deals may offer a low interest rate for a longer period of time rather than a 0% APR. If this is the case for you, then you might want to try out a credit card repayment calculator, such as this one from Credit Karma, to help you determine how much you could end up paying in interest.
It’s important to do the math before committing to a balance transfer offer in order to ensure it’s a smart move financially.
Will a Balance Transfer Save You Money?
A balance transfer may very well save you a significant amount of money, but it’s not necessarily a guarantee. As with most things in the world of credit, the potential costs and benefits depend on your individual situation and must be considered on a case-by-case basis.
If you are a typical consumer who has a few thousand dollars of credit card debt, then most of the time, it is probably fair to assume that a balance transfer could save you money if done correctly. That’s because many credit cards today have interest rates of 15% – 20% and often even higher, up to nearly 25%!
If you are paying that much in interest on any significant amount of credit card debt, then you could almost certainly save money by finding a balance transfer deal with a low interest rate and a low balance transfer fee.
However, it’s still important to crunch the numbers to make sure that a balance transfer is an option that makes sense for you. In order to easily determine whether a balance transfer could save you some money, you can use a balance transfer calculator.
Alternatively, if you’d rather do the math yourself, you can again use the credit card repayment calculator. Follow the steps below:
First, find out how much money it would take to pay off your debt without doing a balance transfer by entering the numbers that are applicable to your current credit card repayment scenario (i.e. the balance owed and interest rate of your current credit card and your expected monthly payment or ideal payoff time). Then, enter the figures that would apply if you were to transfer your balance to a different card. For example, you could plug in the interest rate from a promotional balance transfer offer that you have been pre-qualified for. Also, don’t forget to add on the balance transfer fee to your balance owed in this scenario, which you can easily figure out as we described in the above section. Once you’ve done that, the repayment calculator can tell you how much money you would end up paying toward your debt if you were to transfer your balance. Finally, compare the two results that you got in step 1 and step 2. If the number that you got in step 1 (your current repayment scenario) is lower than the number from step 2 (the balance transfer scenario), then that means you would pay less by staying the course with the repayment strategy you have now. If instead, the amount you calculated in step 2 is lower than the amount you calculated in step 1, then that indicates that a balance transfer with those parameters could save you money!
Comparing balance transfer offers and reading the fine print can help you decide whether a balance transfer will save you money in the end and which balance transfer card is best for you.
Beware of Retroactive Interest Rate Increases
One more important thing to consider when assessing the costs and benefits of a balance transfer is whether you will be charged retroactive interest if you cannot pay off the full balance by the end of the introductory low-interest period.
A retroactive interest rate increase means that you can be charged a higher interest rate on the balance you already transferred to the account in the past, back when you had a lower interest rate.
In other words, not only will you be charged interest on the balance that has not yet been paid, but you will also have to pay the higher interest rate “backdated” to the date you first transferred the balance—and on the original balance amount.
While it is rare for most major credit card issuers to charge retroactive interest, also called deferred interest, many retail store cards and some co-branded credit cards often do.
Although the Credit Card Accountability Responsibility and Disclosure Act (also known as the CARD Act) of 2009 banned banks from arbitrarily increasing credit card interest rates, retroactive rate hikes are still allowed if the contract you signed with your bank permits it.
Make sure to check the terms of your balance transfer card carefully so that you don’t get hit with a ton of surprise interest charges down the road. In addition, be aware that the banks are legally required to give you a minimum of six months at the introductory rate before they are allowed to ramp up the interest rate on your account.
Is a Balance Transfer Good for Your Credit?
In most situations, it is likely that a balance transfer can be beneficial to your credit, especially if you go the route of =opening a new credit card to which you can transfer your balance.
Opening a New Balance Transfer Credit Card
If you open a new balance transfer credit card, this can help your credit by adding available credit to your credit profile and thereby decreasing your overall utilization rate.
Opening a new account does have some drawbacks for your credit, such as the small negative impact of the hard inquiry and the reduction in your average age of accounts. These factors may hurt your score slightly. However, the benefit to your credit utilization will likely outweigh these factors, especially over time, as the impact of the inquiry diminishes and as you keep paying down your balance.
Transferring a Balance Between Existing Cards
The other balance transfer scenario is when you do not open a new balance transfer credit card, but rather, you transfer a balance between credit cards that you already own.
A balance transfer could potentially help both your individual and overall credit utilization ratios.Photo by Marco Verch, CC 2.0.
In this case, there is not as much potential to boost your credit score because you are not adding any additional available credit, which means your overall utilization ratio will stay the same. However, you may still be able to benefit by manipulating your individual utilization ratios.
As you know from our article about the difference between individual and overall utilization ratios, your individual utilization ratios can often be even more important than your overall utilization ratio. For this reason, if you max out even one credit card, that can have a significant impact on your credit.
If you can use a balance transfer to adjust your individual utilization ratios to more ideal levels, then this could improve your credit score. Let’s consider an example to help illustrate how this would work.
Example: Credit Card A has a $1,000 credit limit and is maxed out with a $1,000 balance, so it has an individual utilization ratio of 100%. Credit Card B has a $5,000 limit and no balance, so its utilization ratio is 0%.
What happens if we transfer the $1,000 balance from Card A to Card B?
Card A will then have a $0 balance and 0% utilization ratio, while Card B will then have a $1,000 balance and a 20% utilization ratio ($1,000 balance / $5,000 credit limit x 100% = 20% utilization).
Before the balance transfer, one of the accounts had a $0 balance and the other was completely maxed out. After the balance transfer, one account again has a $0 balance, but the other is only at 20% utilization, which is certainly a lot better than 100% utilization!
This example shows how it’s possible to use a balance transfer to improve the credit utilization portion of your credit score without actually changing the amount of debt you have.
If you’re considering trying this strategy, use our tradeline calculator to help you calculate both your individual and overall utilization ratios so that you can decide whether a balance transfer could help your credit utilization.
Do You Need Good Credit to Qualify for a Balance Transfer Credit Card?
Generally, good or excellent credit is needed in order to qualify for the best balance transfer offers, such as a long 0% APR introductory period and/or no balance transfer fees.
Generally, the best balance transfer offers are reserved for consumers with good or excellent credit.
According to NerdWallet, consumers who have good credit (i.e. a 690 or higher FICO score) might be able to qualify for a balance transfer card with an introductory 0% APR for a period of 12 to 18 months. Some cards may offer even longer introductory periods of up to 21 months.
In addition to having a high credit score, credit card issuers also want to see that you’re not already maxed out on all of your credit cards, which indicates to them that you are desperate for credit and may not be able to pay back all of your debt obligations.
Money Under 30 says that you’re most likely to get approved for a balance transfer card if you can get your overall revolving utilization ratio under 50%. Having at least a few years of credit age under your belt is also a good sign to lenders.
If you have fair credit (580 – 669 FICO score), then it will be more difficult to get a good balance transfer card. You may be able to qualify for a balance card transfer that doesn’t have all the perks of a balance transfer card for excellent credit. For example, it may have a shorter introductory period, a higher APR, or a higher balance transfer fee.
In this case, it’s even more important to do the math before going through with your balance transfer in order to make sure it will still save you money overall despite the fees.
Consumers who have a bad credit score are unlikely to qualify for a balance transfer credit card. Lenders don’t want to take on your debt if they think you are not likely to pay it back, which is what a low credit score indicates. However, there are other things you can do to reduce your credit card debt even if you have bad credit.
What to Do if You Can’t Get a Balance Transfer Card
If you’re not able to get approved for a new balance transfer credit card, don’t give up hope on paying off your debt. There are still a few options that may be a good fit for you.
Transfer Your Balance to a Card You Already Have
Check your existing roster of credit cards and see if any of them 1) have a lower interest rate than what you’re currently paying on your balance and 2) have enough available credit for a balance transfer. If the answer to both questions is yes, then it might be worth transferring your balance to the lower-interest card. However, you should always run the numbers first to be sure.
Get a Secured Balance Transfer Credit Card
Although the offers won’t be as appealing as those for excellent credit, it may be possible to qualify for a secured credit card with a lower introductory balance transfer APR than the rate you’re paying now. Keep in mind that you will need to have some cash on hand for the security deposit required for a secured credit card.
Having someone with good credit cosign with you may improve your chances of getting a better balance transfer offer.
Get a Co-Signer to Boost Your Chances of Approval
As you may recall from our article about “The Fastest Ways to Build Credit,” getting a co-signer with good credit can help you get approved for credit that you might have trouble qualifying for on your own.
If you can find a co-signer willing to accept responsibility for the debt if you cannot repay it, then you may have better chances of getting approved for a decent balance transfer card.
Get a Personal Loan to Pay Off Your Credit Card Debt
Another option for paying down debt with fair credit or bad credit is to apply for a personal loan and use the funds to pay off your credit cards, which is known as a debt consolidation loan. A debt consolidation loan allows you to combine all of your debt into one loan with one monthly payment and a lower interest rate.
However, personal loans for bad credit and fair credit can come with high interest rates and fees, so be sure to read the terms carefully before committing and steer clear of predatory lenders. In addition, watch out for loans that have prepayment penalties, especially if you know you’ll want to try to pay off your loan early.
Ask Your Credit Card Issuer for a Better Interest Rate
Don’t be afraid to call your credit card issuer and ask for a lower interest rate. Most people who request a better rate are successful!
One of the easiest credit hacks that can help save you money on interest and pay down your credit card debt faster is to call your credit card issuer and simply ask them for a lower interest rate. Make your case by explaining why you’ve been a good customer and why you feel that they should lower your rate.
Most people who do this are successful in getting a lower interest rate, so why not give it a try? One phone call could save you a significant amount of money on interest charges and help reduce your credit card debt burden.
Seek Credit Counseling and Create a Debt Management Plan
In extreme cases of credit card debt, it may be necessary to consider working with a credit counseling organization to create a debt management plan. With this option, a credit counselor can help you outline a plan to repay your debt and negotiate with your creditors on your behalf to lower your monthly payments and interest rate.
Keep Building Up Your Credit Score Until You Can Qualify for a Balance Transfer Card
Hopefully, you can use one or more of the above strategies to help make a dent in your debt repayment, but it’s also important to keep focusing on improving your credit over time. With time, patience, and good credit management, you may be able to qualify for a good balance transfer card in the future.
A balance transfer is a good idea when you have determined that it will save you money in the long term and when you have a plan to pay off your balance in the time allotted.
Generally, balance transfers may be a viable option for those with less than $15,000 in debt who can also afford to repay the balance in 21 months or fewer, according to NerdWallet.
On the other hand, a balance transfer may not make sense if you don’t have very much debt or if the interest rate you are currently paying is already fairly low. In these cases, it may not be worth paying the balance transfer fee just to save a little bit of money on interest.
Another important step in deciding whether a balance transfer would be a smart financial move for you is to think about your own psychology and behavior patterns. If you think that having extra credit available to you as a result of a balance transfer may tempt you to spend even more on your credit cards, then a balance transfer may ultimately do more harm than good.
How to Make Sure a Balance Transfer Will Work for You
If you’ve decided that a balance transfer might be a good debt repayment strategy for you, follow these tips to avoid paying interest and ensure that your balance transfer actually saves money in the end.
Choose the right balance transfer credit card.
Choose a card that’s going to be a good fit for you. Look for one with no annual fee, a long 0% APR introductory period, and low balance transfer fees. Read the terms of the card closely and watch out for contracts that allow for retroactive or deferred interest charges.
Crunch the numbers first.
Instead of just assuming a balance transfer is always a good idea, you need to do the math first to ensure that you’ll actually come out ahead in the end.
Don’t miss any payments.
Becoming 60 days late on a payment could sabotage your promotional interest rate and land you with a high penalty APR instead. Not only that, but you would get a derogatory mark on your credit report. Set up automatic bill pay on your account so that you never miss a payment.
Make a plan to pay off your balance before the introductory APR expires.
The point of a balance transfer is to tackle your debt faster while saving on interest, but in order to do so, you need to be able to pay off your balance before the end of the 0% APR introductory period. Make a plan to finish paying off your debt before your interest rate goes up and do your best to stick to it, even if your cash flow is a little tight for a while.
Don’t spend on the balance transfer credit card—or your old card.
Although it might be tempting to use your new balance transfer card for purchases or to run up the balance on your old card again after clearing the balance from it, this is just going to make it even harder for you to get out of debt.
In fact, having extra available credit from opening a new credit card means you could potentially get yourself into an even bigger mess than you were in before.
If you can’t pay off your balance by the end of the introductory period, consider whether you might want to do another balance transfer to a different card.
If you’re going to use a balance transfer as a way to help you pay off debt, then you first need to make sure you have addressed the spending habits that got you into debt in the first place, or the strategy could backfire and end up costing you more instead of saving you money.
If you don’t finish paying off your balance by the end of the promotional period, consider transferring your balance again to another 0% interest card.
Even the perfect plan can go awry when something unexpected happens, such as if you lose your job and can’t pay as much toward your debt as you would like. In other cases, your balance may simply be too large to realistically pay off during the introductory period.
Either way, if for some reason you aren’t able to finish paying off your balance by the end of the introductory promotional offer, then you may want to consider taking advantage of another 0% APR balance transfer offer. This will allow you to have some additional time to pay down your balance without accumulating interest.
Conclusion: Is a Balance Transfer Worth It?
A balance transfer can be a valuable option for those in the process of paying down high-interest debt. It could help you consolidate your payments, save money on interest, and chip away at your debt faster.
However, it’s not an instant cure-all for credit card debt.
You need to change the behaviors that got you into debt before looking into a balance transfer, otherwise, you might end up right back where you started, or even worse off than you were before.
If you do choose to do a balance transfer, it’s imperative to read the fine print, be aware of the terms of your balance transfer offer, and have a realistic strategy in place for paying off the balance.
For a quick summary of the main points of this article, check out NerdWallet’s video about balance transfers below.
People who are serious about improving their credit often wonder what it takes to get the highest possible credit score. For the FICO 8 credit scoring model, the perfect credit score is 850.
As of April 2019, only about 1.6% of scorable consumers in the United States have the elusive 850 credit score, which is actually an increase from 0.98% in April 2014 and 0.85% in April 2009.
There are many other credit scoring models that are used for different purposes and may have different credit scoring ranges. However, since FICO 8 is the most commonly used credit score, we will use the number 850 as the benchmark for the ideal credit score.
Check out the infographic below for some fast facts on how to get the highest credit score possible, then keep reading the article for even more tips on getting the coveted 850 credit score.
Payment History — 35%
Most people who have an 850 credit score have seven years of perfect payment history.
Your payment history is the biggest slice of the credit score pie, so even one late payment or missed payment can significantly affect your score. Negative items can stay on your credit report for up to seven years, so if you miss a payment, you may not be able to achieve a perfect 850 credit score until at least seven years have passed!
To safeguard against the possibility of forgetting to make a payment, consider setting up automatic bill pay for all of your accounts. Be sure to continue to check your accounts regularly in case of any system errors.
If you do miss a deadline once in a blue moon but have otherwise been an upstanding customer, try negotiating with your creditor to see if they will forgive the late payment and wipe it from your record.
FICO says that 96% of “high achievers,” or those with FICO scores above 785, have no missed payments on their credit report.
Essentially, to get an 850 credit score, you just need to follow one simple strategy: make all of your payments on time for a long time. We will further discuss the connection between payment history and time in the “Length of Credit History” section below.
Credit Utilization/How Much You Owe — 30%
The amount of debt you owe compared to your total credit limit is your credit utilization ratio. To get a perfect credit score, you’ll want to keep this ratio as low as possible, both overall and on each of your individual tradelines.
A study by VantageScore and MagnifyMoney found that people with the best credit scores and people with the worst credit scores actually had similar amounts of outstanding debt. However, those with the best scores had an average total credit limit of $46,700—16 times the credit limit of those with the worst scores!
Therefore, for the high scorers, that outstanding debt made up a much smaller percentage of their total available credit than those with low credit limits and poor scores, which highlights the importance of the overall utilization ratio.
This study reported that the average credit card user has an overall utilization ratio of 20%, which is generally considered to be a safe number for maintaining decent credit. To become someone who has an 850 credit score, however, you’ll need to keep it around 5% or lower. As of 2019, FICO says that the average revolving utilization for those with the “850 profile” is 4.1%.
While consumers with 850 credit scores do use credit cards, they tend to keep their utilization ratios around 5% or lower. Photo by Ellen Johnson.
In addition, keep in mind that even if you have a low overall utilization ratio, individual cards with high utilization could still bring down your score. You can read more about this in our article on individual vs. overall credit utilization ratios.
As a hypothetical example, let’s say you have two cards: one with a $10,000 limit and a $0 balance and the other with a $1,000 limit and a $900 balance. Your total available credit is $10,000 + $1,000 = $11,000 and your total debt is $900. Therefore, your overall utilization ratio is $900 / $11,000 = 8% utilization, which is a very good number.
However, your account with the $1,000 limit has a 90% individual utilization ratio! Since you only have two accounts, that means 50% of your accounts have high utilization, and that could negatively affect your credit. According to creditcards.com, maxing out just one credit card can reduce your score by as many as 45 points.
To get around this problem, if you have any individual cards with high utilization, consider transferring the balance to other accounts to keep the utilization ratio on each account as low as possible.
You could also request credit line increases from your creditors, which can lower your utilization ratios and benefit your score. Try using the tips we provide in “How to Increase Your Credit Limit.”
Another way to help with overall utilization is to add low-utilization tradelines to your credit file.
Optimizing this factor also means not closing old accounts even if you don’t use them very often, because their credit limits could be helping your score. To ensure old accounts don’t get automatically closed by the banks for inactivity, try to use them every 1-2 months, perhaps for small, recurring bills.
Length of Credit History (Age) — 15%
This category takes into account age-related factors such as the average age of your accounts, the age of your oldest account, and the ratio of seasoned to non-seasoned tradelines. (A seasoned tradeline is an account that is at least two years old, which is when the account is believed to have a more positive impact on your credit.)
Age goes hand-in-hand with payment history, because the more age an account has, the more time it has had to build up a positive or negative payment history. Together, age (15%) and payment history (35%) make up 50% of your credit score, which shows how important it is to open accounts early and make every single payment on time.
According to FICO, the age of the oldest account of people who have 650 credit scores is only 12 years, compared to 25 years for people who have credit scores above 800. In addition, individuals with fair credit have an average age of accounts of 7 years, compared to 11 years for those with excellent credit.
Cultivating an 850 credit score takes years of maintaining a positive credit history.
FICO reports that the average age of the oldest account of consumers who have 850 credit scores is 30 years old.
We have an in-depth discussion of which age tiers are most significant in our article, “Why Age Is the Most Valuable Factor of a Tradeline,” but the bottom line for getting the best credit score is simply to get as much age as possible. Seasoned tradelines can help by extending the age of the oldest account and the average age of accounts.
Also, keep in mind that it may be impossible to achieve an 850 credit score without a certain amount of age, even if you do everything else perfectly. So if you have stellar credit habits but haven’t yet been able to join the 850 credit club, you may just need to wait patiently for your accounts to age.
Credit Mix — 10%
While the mix of credit is one of the least important factors in a credit score, to get a perfect credit score of 850, you will still need to consider this factor.
In this category, credit scores reward having a balanced mix of several different accounts, including both revolving credit and installment loans. This is because creditors want to see that you can successfully manage a variety of different types of credit.
As an example, a credit file that includes an auto loan, a mortgage, and two credit cards has a better credit mix than a credit file that has four accounts that are all credit cards.
About the “credit mix” credit score factor, FICO says, “Having credit cards and installment loans with a good credit history will raise your FICO Scores. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.”
The total number of accounts is also considered, with more accounts generally being better, up to a certain point.
FICO also states that high score achievers have an average of seven credit card accounts in their credit files, whether open or closed.
Auto loans are common among people who have 850 credit scores.
If you are looking to improve your credit mix statistics, adding authorized user tradelines can increase the total number of accounts and help diversify one’s credit file.
850 scorers also have installment loans in their credit files. According to Experian, the average mortgage debt for consumers with exceptional credit scores (800 or above) is $208,617. In addition, people who have FICO scores of 850 have an average auto-loan debt of $17,030.
Experian says, “In every other debt category except mortgage and personal loan, people with perfect scores had more open tradelines but less debt than their counterparts with average scores—underscoring the value of being able to manage debt while having numerous credit accounts.”
The “new credit” category of your credit score refers to how frequently you shop for new credit. This includes opening up new credit cards and applying for loans, for example. This “new credit” activity is reflected in the number of inquiries on your credit report.
Since seeking new credit makes you look like a higher risk to creditors, each hard inquiry has the potential to drop your score by a few points. Therefore, if you are going for a perfect 850, it’s best to avoid applying for new credit for a while.
However, it is possible to score an 850 with hard inquiries on your record. FICO recently stated that around 10% of 850 scorers had one or more inquiries within the past year, and about 25% had opened at least one new credit account within the past year.
If you need to shop for an auto loan or mortgage, be sure to complete all your applications within a two-week window in order for all of the credit pulls to count as one inquiry. For credit cards, however, each inquiry will be typically be counted individually.
Fortunately, inquiries only remain on your credit report for two years, and FICO scores only consider inquiries that occurred within the past year, so it shouldn’t take long for your credit to recover if you do have new inquiries on your credit report.
Inquiries aren’t the only thing that matters when it comes to the new credit factor of your credit score, however. It also includes data points such as the number of new accounts you have, the ratio of new accounts vs. seasoned accounts, and the amount of time that has passed since opening new accounts. The main idea if you want to maximize your credit score is to not open too many new accounts at once, which can make you look riskier to lenders and bring down your score.
More Tips on How to Get an 850 Credit Score
In addition to optimizing each of the above five categories that factor into your credit score, it is also important to regularly check for errors on your credit report and dispute any inaccurate information both with the credit bureaus as well as with the lenders who furnish the data to the bureaus.
In addition, those with very high credit scores rarely have serious delinquencies or public records on their credit reports, such as bankruptcies or liens. Obviously, this will be easy to avoid if you follow all of the suggestions above, but if you have a history of bad credit in your past, it could take up to 7-10 years to recover enough to get an 850 credit score.
850 Credit Score Benefits
What are the benefits of being in the 850 credit club? In reality, you’ll be able to take advantage of the benefits of having an excellent credit score whether you have a 760 credit score or an 850 credit score. You don’t need to score a perfect 850 to get the best credit cards or the best interest rates on loans.
Essentially, the main benefit of having the best possible credit score is bragging rights!
Final Thoughts on How to Get the Perfect Credit Score
While it’s probably not necessary to get an 850 credit score, it is smart to work toward the goal of having excellent credit by managing your credit wisely, which will eventually get you into the upper levels of high credit score achievers.
The most important factors of your credit score are payment history, utilization, and age. Therefore, to keep your credit in pristine condition, you’ll need to make all of your payments on time, keep your utilization as low as possible, and maximize your credit age. Beyond that, you’ll also want to maintain a balanced mix of accounts and minimize new credit inquiries.
Finally, take advantage of your three annual free credit reports to make sure your credit reports are free of damaging errors.
To summarize, here’s an example of what the credit profile of someone who has an 850 credit score might look like, as we illustrated in the infographic above:
No missed payments or delinquencies within the past seven years A high total credit limit The overall utilization ratio is 5% or lower Individual credit cards each have low utilization, around 5% or lower The oldest account is likely about 25-30 years old The average age of accounts is at least 11 years Typically has at least seven credit card accounts (whether open or closed) Usually has an auto loan and/or a mortgage loan May have additional installment loans Minimal inquiries within the past year No damaging errors on their credit report
Have you ever achieved the perfect 850 credit score? Is it a goal that you are currently working toward? Share your thoughts with us by leaving a comment below!
Q. I am planning to apply for a new apartment soon and my credit score is 678 from Equifax and 608 from Transunion. What do most rental companies require to get approved? This is a low-income property.
I also want to get a new credit card for someone with low income and no annual fee. Are there any credit cards that will give me a card with my current credit scores? Also, should I wait to get a credit card after the apartment complex does their credit check or should I get a credit card first?
Dear Reader,
Each rental company will look at your credit report differently. Ultimately, they want to know if they can trust you to pay them on time every month. Because your credit score is considered fair, you may end up needing to have a bigger deposit to secure an apartment.
Having only fair credit can make it difficult to get a credit card with a decent interest rate. However, you can look for a secure credit card. These cards work like regular cards, but they are secured by a deposit you make. Secured cards provide a great way for people with no credit or with a low score the opportunity to improve their scores and their credibility.
Be sure to do your homework and compare several secured credit cards. Look for one that meets your needs–in this case, one that does not have an annual fee. Another option for improving your credit would be to check out Experian Boost. It uses your phone and utility bill payments to “boost” your score if you have been paying those regularly and on-time.
Now, whether you should wait to get your card after the apartment company reviews your credit, I think you should. Whenever you ask for new credit, even for a secured credit card, a hard inquiry is generated on your report, and it lowers your credit score. So, it’s best to have the highest possible score to get your apartment.
After that, apply for the card and use it strategically, always paying on time and only using up to 30% of your available credit or less. If you need additional guidance, feel free to contact an NFCC-certified credit counselor from a local nonprofit near you. They are ready to help and can provide more personalized recommendations for improving your credit. Good luck!
Sincerely,
Bruce McClary, Vice President of Communications
Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.
Credit mix, also called mix of credit, is one of the factors that your credit score takes into account. It is one of the least important factors, weighing in at 10% of a FICO score.
Credit mix is the diversity of types of credit accounts in your credit report. Having different types of credit accounts in good standing in your credit file demonstrates that you can use credit responsibly. Lenders ideally want to see that you have successfully managed a diverse mix of multiple types of accounts.
Types of Credit Accounts
Depending on how you define the types, there are 3-4 general categories when it comes to types of credit.
Revolving credit is a form of credit with which you can “revolve” or carry a balance each month. You are assigned a credit limit that you can charge up to and you make a payment each month. Interests will typically be charged if you carry a balance from month to month. Credit cards and lines of credit are the most common types of revolving credit accounts. Charge cards are similar to credit cards, except the balance must be paid in full every month. Service credit includes accounts with your service providers, such as utilities, cell phone service, etc. These are considered credit accounts because the service is provided before you pay the bill. Installment credit is a loan of a specific amount of money that you pay back in regular payments of the same amount over a certain period of time. Types of installment loans include car loans, mortgages, student loans, etc.
Credit Karma simplifies the categories to 3 types of credit:
Revolving credit Open credit (includes charge cards) Installment credit
Examples of Revolving Credit
As we touched on above, the two most common types of revolving credit are credit cards and lines of credit.
Credit cards include those issued by banks such as Capital One, Bank of America, and Chase, as well as store cards, which can typically only be used at a particular retailer. Lines of credit are similar to credit cards in that you have access to a set amount of money—your credit limit—that you can draw from. After you borrow money from your line of credit, the balance starts accruing interest, and when you pay it back, that credit is then available again for you to use. This is why it’s considered revolving credit: you can use it again and again as long as you keep paying it back.
Types of Lines of Credit
A home equity line of credit (HELOC) is secured by your home.
Lines of credit can be either secured, which means the borrower has provided collateral to back the line of credit in case of default, or unsecured, meaning no collateral is required.
Beyond those general categories, there are three main types of lines of credit.
A home equity line of credit (HELOC) is a line of credit secured by your equity in your home, which is the difference between the value of your home and the amount you still owe on your mortgage. Since your home equity serves as collateral, if you default on a HELOC, you could risk losing your home to foreclosure. A personal line of credit is usually unsecured, although sometimes you may be able to provide collateral in the form of savings or investments. A business line of credit may be secured or unsecured. They are offered by financial institutions as well as many commercial vendors.
Examples of Installment Loans
An auto loan is one type of installment account.
Types of installment credit include:
Auto loans Mortgages Student loans Personal loans Credit-builder loans Home equity loans (not to be confused with a HELOC, which falls under revolving credit)
The breakdown of account types outlined above is a simplified version of how credit scoring systems actually categorize different types of accounts. In reality, credit scoring models may consider as many as 75+ account types.
In addition, each type of account could have a different effect on your credit.
How Does Credit Mix Affect Your FICO Score?
As we mentioned at the top of this article, credit mix makes up about 10% of your FICO score. With VantageScore, type of credit and credit age are combined into the same category, which makes up approximately 21% of your VantageScore.
With both types of scores, credit mix is a relatively small portion of what determines a credit score, so having the perfect credit mix is not necessarily essential in order to have good credit. However, it’s still a good thing to aim for, especially if you want to get a perfect 850 credit score or somewhere close to it.
What Is a Good Credit Mix?
When it comes to your credit score, the most important thing is to demonstrate that you have managed both revolving and installment accounts. Therefore, it’s best to have at least one type of account of each type.
FICO high score achievers have an average of seven credit cards on their credit reports. Photo by Hloom on Flickr.
For example, you might have a credit card (revolving) and an auto loan (installment). Or, you could have a mortgage (installment) and a HELOC (revolving). Any combination of one revolving account and one installment account is a good start for your credit mix.
FICO supports this idea, saying, “Having credit cards and installment loans with a good credit history will raise your FICO Scores.”
FICO also says that people who have managed credit cards responsibly are better off than consumers that don’t have any credit cards, who can be seen as risky because they have not demonstrated experience in using revolving credit.
Statistics show that high FICO score achievers have an average of seven credit cards on their credit reports, which includes both open and closed accounts.
People with credit scores in the 800s also typically have installment loans such as mortgages and auto loans, according to Experian.
The total number of accounts in your file may also play a role. FICO has indicated that those with high credit scores can have 20+ credit accounts in their credit reports.
How Many Credit Cards Is Too Many?
Having too many credit card accounts could hurt your credit score.
Keep in mind that it is possible to have too many accounts on your credit file. According to the FTC, having too many credit cards could have a negative effect on your credit score, as could having loans from some types of companies.
There is no hard-and-fast rule when it comes to how many credit cards is too many because the impact of any given factor on your credit score depends on what is already in your credit profile, says FICO.
However, in figure 1 in the article “How Credit Actions Impact FICO Scores,” the hypothetical consumer “Rachel,” who has 33 credit accounts, has a lower credit score than “Maria,” who has 21 accounts. This would seem to imply that at some number between 21 and 33 accounts, one’s credit score might begin to suffer. However, these two consumers have other differences in their credit profiles, so the difference in their credit scores cannot be solely attributed to the number of accounts in their files.
Can Some Account Types Hurt Your Credit?
Certain types of loans on your credit report could make you seem like a more risky consumer and therefore could end up hurting your score instead of helping.
Why? It’s all based on statistics and who the credit score algorithms have deemed to be risky borrowers.
For example, taking out a furniture loan could actually drop your credit score. That’s because furniture loans are often reported as “consumer finance loans,” which are typically reserved for borrowers with bad credit who are statistically more likely to default on loans. Therefore, having this type of account on your credit report could be viewed as risky by lenders and credit scoring algorithms.
Alternatively, the financing arrangement may be reported as revolving debt, which will appear nearly maxed out until you make enough payments to get the balance to a lower level.
Payday and title loans, however, are typically not reported to the credit bureaus, so these types of loans won’t count toward your credit mix or credit score—unless, of course, you default on a loan and it gets sold to a collection agency, who will then report it as a collection account.
Conclusions on Credit Mix
Since credit mix makes up about 10% of your credit score, it is helpful to try to achieve a balanced mix of credit by keeping a few revolving and installment accounts in good standing. The best credit mix should ideally include a few credit cards and at least one or two installment loans, such as mortgages or auto loans.
However, it’s also important to note that credit mix is much less important than other credit score factors, such as payment history, credit utilization, and credit age. It’s probably not worth obsessing over because you won’t automatically get an excellent credit score just by having the perfect mix of accounts.
In addition, most people naturally accumulate different types of accounts over time, so it’s not necessarily the best idea to start opening new accounts left and right just to build up your credit mix. This strategy could result in lots of inquiries and new accounts bringing your score down in the short term, and having access to credit you don’t need could also encourage extra spending.
As with all credit-related decisions, it’s up to you to take your overall financial goals and priorities into account before taking action. You might decide that you don’t need to worry too much about improving your credit mix, and that’s fine. On the other hand, improving your credit mix can only help your credit score, and it is something that you should pay attention to if you want to get a perfect 850 credit score.
Secured credit and unsecured credit are types of credit that are very different in terms of risk to consumers and lenders.
When you are paying for purchases, is it better to use a debit card or a 
Credit cards are not only a useful payment method for making purchases but also an essential component of a solid 
Balance transfers are a somewhat controversial topic in the world of 
Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.
