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May

2024

10 Advantages of Credit Card: Perks of Using It

10 Advantages of Credit Cards

By Jackie Lam | Credit, Family Finances, money | Comments Off

You may already know that credit cards offer an easy and convenient way to make purchases, but that’s just one of many potential credit card benefits. From rewards offerings like cash back, travel points, and one-time bonuses, to financial benefits like payment security, the opportunity to build credit, and a grace period, there are a number of reasons to keep a credit card in your wallet.

Read on to learn 10 advantages of using a credit card, as well as some tips to ensure you use your card responsibly.

1. Cash Back

Many credit cards allow you to earn cash back on everyday purchases, such as gas or groceries, a reward introduced long ago in the history of credit cards. Essentially, with cash back, you get a small amount back in cash that’s a percentage of how much you spent.

With cash-back cards, you can usually put any cash you receive towards your credit card balance, or you can opt to receive the money through a direct deposit to your bank account, as a check or gift card, or put it towards other purchases.

2. One-Time Bonuses

Credit cards sometimes will offer a one-time, introductory bonus that allows you to earn enhanced rewards as long as you spend a certain amount on your card within the first months your account is open. For instance, you might be able to earn a bonus of 75,000 reward points if you spend $4,000 within the first three months of opening your card. These rewards can be a great way to get something extra out of opening a new credit card.

3. Reward Points

Reward points are similar to cash-back rewards in that they offer an incentive for you to use your card. You’ll earn points for every dollar you spend on your card, such as one cent for every dollar spent. You can then redeem those points to put towards travel, gift cards, merchandise, charitable donations, or statement credits.

4. Safety

Another one of the many perks of how credit cards work is the built-in security and safety features they offer. Many major credit card issuers offer a zero-liability policy for fraud, meaning you won’t be responsible if any fraudulent purchases are charged to your account. Other credit card safety features include encryption and chip-and-pin technology, which keeps your account information safe when using your card for in-store transactions. Plus, many credit cards offer fraud and credit monitoring services to allow you to easily keep tabs on your account.

Compared to debit cards, credit card security tends to be much more robust and the protections against fraud are more consumer-friendly.

Recommended: What is a Charge Card

5. Grace Period

This usually isn’t the first advantage of a credit card that comes to mind, but it’s a major one and a key part of what a credit card is. A credit card’s grace period between when your billing period ends and when your payment is due. During this grace period, no interest accrues. So if you are able to pay your balance in full during the grace period, you won’t owe any interest.

6. Insurance

Many credit cards come with insurance. For instance, travel credit cards might come with travel insurance, trip cancellation insurance, trip delay insurance, or rental car collision insurance. Cards may also offer price protection, extended warranties, purchase protection, or phone protection.

7. Universal Acceptance

Credit cards are pretty much accepted anywhere, and you can use one whether you’re paying a bill via snail mail or making a purchase in store, online, or over the phone. A credit card can be used to pay for most things, including paying taxes with a credit card.

Breaking it down by credit card network, Visa and Mastercard are accepted in over 200 countries, as are Discover cards; American Express cards are accepted in over 190 countries. This comes in handy when you’re traveling and don’t want to fret about converting your U.S. dollars into foreign currency.

If you’re running a business, accepting credit card payments can help prevent fraudulent activity, such as someone trying to pay with counterfeit bills. It can also make it easier to keep track of transactions and purchases related to your business.

8. Building Credit

Another major perk of using a credit card is that it can help you build credit. Credit card issuers report your activity to the three main credit card bureaus — Transunion®, Equifax®, and Experian® — which is then used to calculate your credit score.

If you maintain a continuous streak of on-time payments, it will help with your payment history, which makes up 35% of your credit score. Plus, the longer you keep a credit card open, the more it helps with your length of credit, which is 15% of your score. A credit card can also help you build credit because it helps with your credit mix, which makes up 10% of your score.

9. Increased Purchasing Power

Having a credit card can increase your purchasing power, as you’ll have access to a line of credit that can make it easier to buy big-ticket items. For instance, if you’re down to $1,000 in the bank, you won’t be able to purchase that new $2,000 laptop. But if you have a credit line of $3,000 (and know you have a paycheck en route), you can purchase that laptop you’ve been wanting when it’s on sale and then pay it off when the funds hit your bank account.

Take this credit card advantage with a grain of salt, though — using your credit card to cover more than you can immediately afford to pay off can lead you to get into credit card debt.

10. Keeping Vendors Honest

Unscrupulous behavior from vendors does happen, unfortunately. If you pay a vendor through another means, such as cash, Venmo, or by writing a check, the vendor will have an easier time getting away with not providing the goods or services they promised.

But if you pay a vendor using a credit card, the credit card issuer has an incentive to get to the bottom of the issue and prevent fraud. And if you dispute a credit card charge, the issuer will withhold funds from the vendor. In turn, the transaction won’t go through, and you may be able to get your money back.

What to Look for in a Credit Card

Before applying for a credit card, do some comparison shopping first. Think about what kind of credit card you might need. Depending on your needs, preferences, and lifestyle, a travel credit card or cash-back card might be the best fit for you. Or, if you’re after a card with a low APR and minimal fees, a solid everyday card might be a better fit. If you’re working to rebuild your credit, you might consider a secured card.

Besides any credit card perks, look at the card’s interest rate. Your annual percentage rate (APR) will vary depending on your creditworthiness and the type of card you’re applying for (top rewards cards tend to have higher APRs than more basic cards). In general, however, a good APR for a credit card is one that’s below the current average credit card interest rate, which is 22.8%, according to the Federal Reserve.

Additionally, it’s important to check whether a card has an annual fee. If it does, look at its perks and how much you anticipate putting on the card in a given year to see if that fee is worth it. Also take into consideration any other fees a credit card may charge, such as late payment fees, foreign transaction fees, and balance transfer fees. You may want to avoid as many credit card fees as possible.

Using a Credit Card Responsibly

To use a credit card responsibly, it’s crucial to make on-time payments of at least the minimum payment due each billing cycle. This ties in with not spending more than you can afford to pay back, or running up a high balance on multiple cards, both of which could lead you into credit card debt.

Another rule of thumb to use your credit card responsibly is to keep your credit utilization ratio — the total amount you owe divided by your total available credit — under 30%. The average credit card limit in the U.S. is currently just under $30,000. So, to maintain a 30% credit utilization ratio, you’d need to keep your balances below $10,000.

When Not to Use a Credit Card

If you’re spending more than you can afford to pay back (or pay back within a reasonable amount of time), then it’s best to avoid using a credit card. The advantages of a credit card aren’t worth it if using credit cards is causing you to get into debt.

You’ll rack up interest charges on any remaining balances each month, and those costs can start to add up fast. While there are options like credit card debt forgiveness, they aren’t necessarily easy to get, and you can damage your credit score in the process.

The Takeaway

As you can see, there are a number of potential advantages of credit cards, from rewards to payment security to an interest-free grace period. Enjoying credit card benefits requires using your credit card responsibly though. If you’re racking up more charges than you can afford to pay back, the interest and other implications could quickly outweigh the credit card advantages.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How secure are credit cards?

Credit cards come with many security features, such as pin-and-chip technology, fraud and credit monitoring, and zero-liability fraud protection. Plus, there are usually features like two-factor authentication or biometrics at login, and you can temporarily freeze your credit card if you suspect fraudulent activity.

How can I protect myself from credit card fraud?

You can protect yourself from credit card fraud by reviewing your credit card statement regularly, storing your cards safely, keeping your passwords protected, and being vigilant when using your credit card. You can also set security alerts for transactions over a certain dollar amount or for in-person, online, or phone purchases. If you suspect fraudulent activity, block your card, and report the suspicious activity immediately.

Do credit cards allow you to save more?

Credit cards usually enable you to spend more. However, if used smartly and responsibly, they can help you save through credit card rewards and other advantages, such as insurance and discounts. However, you’ll want to stay on top of payments and ideally pay your balance in full. Otherwise, the interest charges might outweigh any perks.

Should I use a credit card if I have a poor credit score?

If you have a poor credit score, it could be a good idea to use a credit card to build your score — as long as you can use it responsibly and manage on-time payments. Keep in mind that those with poor scores likely won’t get approved for the cards with the most competitive rewards, and they may face a higher APR and fees.

Photo credit: iStock/Suphansa Subruayying

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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May

2024

What Is a Credit Card Number? What Each Digit Means

All You Need to Know About Credit Card Numbers

By Kim Franke-Folstad | Credit, Financial Independence | Comments Off

A credit card number — that long string of digits on the front or back of every credit card — contains more information than you might think. Though credit card numbers may seem rambling and random, each digit actually has a specific purpose and place. The number you see on a credit card provides information about the individual account holder, the payment network, and the card issuer. It also uses a special formula to help prevent transaction errors and fraud.

Here, gain a deeper understanding of the significance of each digit.

What Is a Credit Card Number?

A credit card number is a set of digits — usually 16 — that’s printed on the front or back of a credit card.

It’s important to note that your credit card number is not the same thing as your account number. Your credit card number includes your account number, but it has additional digits (an account number typically has 12), and it provides more information. When you make a credit purchase online or on the phone, you can expect to be asked for your full card number to authenticate the transaction.

Though the information provided by every credit card number is basically the same, the format may differ a bit from card to card: Sometimes the numbers are raised; sometimes they’re flat. And generally, although not always, the digits are divided into four sets of four (xxxx xxxx xxxx xxxx).

The format for credit cards and debit cards is similar — which is why you might pull out the wrong card from time to time.

Who Decides What Your Credit Card Number Is?

Your credit account number is assigned by the financial institution that is your credit card issuer. But the structure and sequence of the digits in your credit card number must follow a rigid set of standards imposed by the International Organization of Standardization (ISO) and enforced by the American Network of Standards Institute (ANSI).

All card issuers follow these rules, so consumers can use their cards or card numbers no matter where they are in the world.

Credit Card Number Structure

Even if you know what a credit card is and how credit cards work, you may not be familiar with what the numbers on your card mean. Though most credit card numbers have 16 digits, the length may vary. Of the four major card networks, Visa, Mastercard, and Discover card numbers all have 16 digits, while American Express card numbers have only 15. Here’s what those digits actually mean.

The First Number: Industry Identifier

The first digit in a credit card number is known as the Major Industry Identifier (MII), and it can tell you both the industry associated with the card and the payment network.

Payment Network

Most credit cards start with a 3, 4, 5, or 6. These numbers represent the major payment networks, each of which has its own identifier:

• American Express cards begin with a 3

• Visa cards begin with a 4

• Mastercard cards typically start with a 5, but may start with a 2

• Discover cards start with a 6

Knowing your credit card’s payment network can be useful, because the network determines which merchants will accept the card. Your favorite local market or small boutique might accept credit card payments with a Mastercard, Visa, or Discover card, for example, but they may not let you pay with American Express.

Recommended: When Are Credit Card Payments Due

Industry Association

There are many different types of credit cards. Some credit cards are meant for general use, while others may be geared to a more specific purpose. The MII can tell you which type of industry your card is most associated with. Here’s what some MIIs generally mean:

• 1: Airlines

• 2: Airlines and financial

• 3: Travel and entertainment

• 4: Banking and financial

• 5: Banking and financial

• 6: Merchandising and banking

• 7: Petroleum

• 8: Health care and communications

• 9: Government and other

The Next 5 Numbers: Identification Numbers

The next five digits complete the Bank Identification Number (BIN), or Issuer Identification Number (IIN). This can tell you who the card issuer is.

The credit card issuer is the financial institution that offers the card and manages your account. Some of the largest credit card issuers in the U.S. include American Express, Bank of America, Capital One, Chase, Citi, Wells Fargo, and Discover.

When you apply for a credit card, it’s the issuer who accepts or declines your application. When you make a purchase, you’re borrowing money from the credit card issuer, and when you pay your bill, you’re paying back that money. Any time you check your balance, request a higher credit limit or a lower interest rate, or obtain a replacement card, you’re doing it through your credit card issuer.

The Next 9-12 Numbers: Account Identifier

The remaining digits on the card — except for the very last one — identify the account and the cardholder.

Don’t worry, there isn’t a secret indicator in your card number that tells people how often you’re using your credit card or if you’re paying your bills on time. This part of your card number simply represents what account the card is connected to.

If your card is lost or stolen, or your card number is compromised in a credit card scam, you may notice that the number on your replacement card has changed, even if your account number hasn’t. So if you’re keeping a list of card numbers in a secure place, you may have to update that card number.

The Last Number: Checksum

The last digit of a credit card number is referred to as the “checksum” or “check digit.” Card issuers and payment networks use it to catch errors and help protect against unauthorized card use. (Let’s face it: Even if you follow all the so-called credit card rules, things can happen.)

When a card is used for a purchase or payment, this digit is used as part of a mathematical formula called the Luhn algorithm to verify the card’s validity. If the checksum doesn’t work, the transaction is quickly rejected. (If you’ve ever mistyped your card number when shopping online, you’ve seen this algorithm in action.)

Most major networks use the final digit as the checksum. However, if you have a Visa credit card, it may be the 13th digit.

What About the Other Numbers on the Card?

Besides the card number, there are two other sets of digits that also can play a critical role when you use your credit card.

Card Verification Value (CVV)

The Card Verification Value (or CVV number on a credit card) or Card Verification Code (CVC) is also used to protect the card owner. If you do a lot of online shopping, you’re probably very familiar with this three- or four-digit number, which usually is found on the back of a credit card near or inside the signature strip.

On some cards, there may be seven digits in this spot. If this is the case, the first four digits you see are the last four digits of your credit card number. The last three digits in the grouping represent the CVV.

If you have an American Express card, the CVV is a four-digit number located on the front of the card, just above the logo.

The CVV is designed to help protect against identity theft. If you aren’t presenting your card in person during a transaction (because you’re using it online or over the phone), providing the CVV can help prove you’re in possession of the physical card.

Expiration Date

The expiration date offers yet another layer of protection for the card holder. Most businesses require that you provide the credit card number, the CVV, and the card’s expiration date when you make an online purchase.

The credit card expiration date typically appears on the front of the card with two digits for the month and two digits for the year (xx/xx). But if the account number is printed on the back of the card, you’ll likely find the expiration date there.

Even if you never need to use it to make a remote purchase or payment, it can be a good idea to glance at your card’s expiration date from time to time. That way, you can ensure you always have a current card in your wallet.

You’ll also know when it’s time to watch for the arrival of a replacement card. If a new card doesn’t arrive in the month the old card expires, you can call the issuer and immediately take steps to protect yourself if it appears the card has been lost or stolen. (The phone number for customer service is also on your card.)

The Takeaway

At first glance, the number on your credit card might look like a meaningless jumble. But if you take a closer look, you’ll find each digit has a purpose — to provide information, to help keep your account secure, and to make the card more user-friendly.

FAQ

Where do I find my credit card number?

Your credit card number may appear on the front or back of your credit card.

Is the credit card number the same as the account number?

No, the two numbers are linked, but they are not the same. Your credit card number includes your account number, but it has more digits, and those extra digits are important to how each transaction is processed.

How long is a credit card number?

A credit card number typically has 16 digits, but the number can vary. American Express uses a 15-digit format for its credit cards.

Can a credit card number be stolen?

Yes. A credit card number can be stolen in multiple ways: through the theft of a physical card, during a data breach, with a card skimmer, or if the cardholder uses an unsecured website or public Wi-Fi when making a credit transaction.

Photo credit: iStock/max-kegfire

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May

2024

What Is a Credit Limit and How Is It Determined?

By Brian O'Connell | Credit, Financial Independence | Comments Off

A credit limit is basically what the term suggests: A financial cap on a credit card account that limits how much money the cardholder can borrow from the card issuer. By including a maximum spending amount, the card issuer buys itself some protection against the cardholder borrowing more than they can pay back on an ongoing basis.

There’s more to the story, however, when it comes to credit card limits and how they’re determined. Here’s a closer look at what a credit limit is and what happens if you go over your credit limit.

What Is a Credit Limit?

As mentioned, a credit limit is the maximum amount that you can charge with your credit card, which represents a line of credit. The amount is determined based on information provided in a credit card application, such as the applicant’s credit score, income, and existing debts. Usually, the higher the credit, the higher above the average credit card limit someone will receive.

It’s also important to note that credit card limits aren’t set in stone. A cardholder may receive a higher credit card limit if they make their payments on time and stay well within their credit limit. Conversely, if card payments are late (or worse, not made at all) or if there are other signs of risk, such as nearing or exceeding their credit card spending limit, then the card issuer may decrease someone’s credit limit.

Recommended: What is a Charge Card

Credit Limit and Available Credit

Each purchase made with a credit card is deducted from your total credit limit, resulting in your available credit. For example, let’s say someone has a credit limit of $10,000. If they spend $2,000 at a store that accepts credit card payments, their available credit falls to $8,000. If they were then to make a $1,000 payment toward their balance, their available credit would increase to $9,000.

In this way, your available credit will fluctuate over time depending on purchases and other transactions you’ve made, as well as any payments, including credit card minimum payments, made on the account. Your credit limit, on the other hand, remains constant regardless of account activity.

Credit Limit and Credit Scores

There’s another good reason to keep your credit card spending in check, and significantly below your card limit — it affects your credit score.

When FICO® (one of the most popular credit scoring systems) calculates its benchmark credit scores, it places a significant weight (30% of its total credit score calculations) on credit utilization. Credit utilization ratio compares the amount of credit a cardholder is using to the total available credit they have.

For instance, a card owner may have $10,000 in total available credit, but owe a total of $9,000 on the card. That represents a 90% card utilization, which is considered high and may raise a red flag for lenders. It may suggest overspending and potentially an inability to pay. As such, a high credit utilization ratio could result in a lower credit limit for the cardholder, whether that’s a decrease on their existing limit or lower limits offered on new accounts.

It’s usually recommended that cardholders keep their card utilization rate below 30% to avoid negative effects on their credit score. In the above example, that means the cardholder with a $10,000 credit card limit shouldn’t owe more than $3,000 on the card.

How Much of Your Credit Limit Can You Use?

Technically, you can spend up to your credit limit. However, using too much of your total credit can adversely affect your credit utilization ratio, a key factor in determining your credit score.

It’s suggested to keep your credit utilization below 30% — which means using no more than 30% of your overall credit limit. This is why it’s always important to make payments, even if you’re in the process of requesting a credit card chargeback or other dispute.

How Is Your Credit Limit Determined?

The formula for determining a credit card limit depends on which scoring model the card provider uses. Generally, one of three distinct credit limit models is used: credit-based limits, predetermined credit limits, or customized limits.

Credit-Based Limits

With credit-based limits, card providers leverage your credit score to determine credit limits. In doing so, card companies rely on the same financial formula that credit scoring agencies use to create a credit score — a cardholder’s payment history, credit utilization rate, total length of credit history, credit mix, and any new credit inquiries. Card companies may also take a close look at the card owner’s total annual income, total household expenses, and type of employment.

Basically, the better you are at making on-time credit card payments, curbing household debt, and handling consumer credit, the more likely you are to get a higher credit card limit under the credit-based limits model.

Predetermined Credit Limits

This credit limit calculation model relies on a “ladder approach” to determine credit limits. In this scenario, credit card issuers assign a credit limit based on the type of card. In other words, every card in a certain tier — such as an entry-level card or a premium rewards card — would come with the same credit limit rather than the credit limit being determined based on the individual consumer.

The more features and amenities a chosen credit card has, the higher the credit limit typically is under this model. For example, a premium credit card with robust benefits and generous cash-back rewards may have a credit limit of $10,000. Meanwhile, a more bare bones credit card for entry-level cardholders may have a credit limit of $500.

Customized Credit Limits

With customized credit limits, card providers tailor the credit limit to the individual credit card consumer. They may do so in different ways based on different criteria.

For example, one credit card issuer may base its decision on a cardholder’s annual household income, while another may prioritize the number of credit cards an individual already owns, along with their existing credit limits.

In that way, card companies are drilling down into an individual’s financial history and basing their credit limit decision on myriad factors. Once again, the stronger a card candidate’s financial resume, the more likely that individual is to receive a higher credit card limit.

Can You Spend Over Your Credit Limit?

In general, credit card companies prevent spending over the credit card limit.

When a cardholder has reached their limit and attempts to use their credit card, the transaction may be declined.

In some instances, however, the card issuer may allow the transaction to go through and instead impose a financial penalty for spending over the credit card limit. According to the Credit Card Act of 2009 (CCA), the card company can’t assess a fee that’s more than the amount spent over the credit limit. So, for instance, if you overspent by $30, your fee couldn’t be more than $30.

Typically, the card owner must opt in to allow for purchases over the credit limit to be approved. The CCA legislation mandates that credit card companies can’t arbitrarily charge an over-the-limit fee without the cardholder’s signed consent. For that reason, most card providers have eliminated over-the-limit fees and simply deny the transaction instead.

Check with your card company to see if it still charges over-the-limit fees. If so, and you object, ask to opt out and focus on keeping your credit card balance well below your card spending limit.

Is It Possible to Increase Your Credit Card Limit?

Credit card limits aren’t static. They can go up — especially if a card customer asks for a credit limit increase — and they can also go down.

Perhaps the easiest way to increase your credit limit is to contact your card provider and ask for a credit limit boost. You can usually make this request over the phone or on the card issuer’s website or mobile app.

Before you make any request for a credit card limit increase, check your credit report to see that your financial health is in good standing, as your card provider will likely treat your request for a credit limit hike like any request for credit. That means a thorough credit check to ensure your credit card payment history is strong, your credit score is good, and your job situation or annual household income hasn’t deteriorated.

The credit card company will review those financial factors and let you know whether or not your request for a credit increase is approved. If you’re denied a higher credit limit, your best recourse is to take some time to improve your credit score and build a stronger credit profile.

In some cases, you can apply for a new credit card with a higher credit limit. However, expect any new card issuer to conduct the same rigorous credit vetting your original card company conducted given how credit cards work.

The Takeaway

Credit card companies assign credit card limits to consumers based on one of three typical models. Often, your ability to handle credit and pay it back on a timely basis comes into play when determining how high your credit limit is. If you’d like a higher credit card limit, you can ask your current card issuer if your financial status has improved, or you could consider applying for a new credit card.

FAQ

Can lenders change credit limits?

Yes, lenders can change credit limits — particularly if a credit card holder asks them to do so. But credit limits are unlikely to change for the better unless the cardholder has a solid credit history and financial situation.

What is a normal credit card limit?

That depends on the individual and credit card companies, but the average credit limit for U.S. cardholders is currently almost $30,000. That said, individual credit card limits can vary depending on a variety of factors, and can be as low as $300.

How do I get a high credit card limit?

A good way to get a high credit limit is to display habits that show creditors that you’re a low credit risk. That means paying your bills on time, keeping debt low, and having a robust credit history.

Photo credit: iStock/RgStudio

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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May

2024

Fixed vs. Variable Credit Card Interest Rates: Key Differences

By Brian O'Connell | Credit, Family Finances, money | Comments Off

Anyone who’s ever had a credit card knows they have an interest rate, which represents the cost consumers pay for borrowing money. What you may not know is that interest rates come in two forms: fixed and variable interest rates.

Fixed interest rates stay the same over time and are generally tied to your creditworthiness. Variable interest rates, on the other hand, may change over time and are connected to economic indexes. Read on to learn how to determine if the interest rate of a credit card is fixed or variable, as well as why it’s important to know.

What Is Credit Card APR?

A credit card’s annual percentage rate, or APR, represents the cost a consumer pays to borrow money from credit card issuers, represented as a yearly cost.

When a cardholder doesn’t pay off their credit card balance in full each month, they’ll owe credit card interest charges on the remaining balance, with the rate based on their APR.

Credit card APRs vary among credit card issuers, individual cardholders, and credit card categories. Currently, the average credit card interest rate stands at 22.8% APR.

Recommended: Pros and Cons of Charge Cards?

Types of Credit Card APRs

Your credit card payment is impacted by what type of APR your credit card has. Let’s have a look at how a fixed rate credit card and a variable rate credit card may affect your credit experience.

Fixed Interest Rate

Fixed rate credit cards have an interest rate that generally doesn’t vary over the course of your credit card contract. Rather than being tied to economic indexes, fixed interest rates are generally determined based on payment history and creditworthiness, as well as any ongoing promotions.

However, just because the term “fixed” is used, doesn’t mean a fixed interest rate can never change. While a fixed rate credit card’s interest rate won’t change based on factors like the prime index, increasing credit card APR can occur if payments are late or missed or if your credit score dips. If that occurs, the credit card company must notify the cardholder at least 45 days before the adjusted rate takes effect.

While fixed rate credit cards offer the benefit of predictability, one downside is that their rates are, on average, higher than variable credit card rates.

Variable Interest Rate

A variable rate credit card offers interest rates that can shift over time. There’s a reason for that, as variable card rates are tied to major benchmark interest rates, like the U.S. prime rate.

Since major benchmark rates change, so will variable interest rates. That’s why banks and other major financial institutions often shift rates for things like credit cards, home mortgages, auto loans, and student loans. When major interest indexes change, the rates for loans change with them.

What does that mean for a cardholder? For starters, there’s more risk with variable interest rates. Rates can go up, and credit card payments increase when interest rates rise. Conversely, variable rates may go down, which works in favor of the credit cardholder, who will then pay less in interest.

Credit card consumers should check their credit card contracts for the specific conditions that can trigger a variable rate change. Credit card issuers don’t have to notify you of interest rate changes with variable rate cards, so it’s up to the consumer to keep a sharp eye out for changing interest rates.

When Do Variable APRs Change?

As mentioned, the interest rate on a variable rate credit card changes with the index interest rate, such as the prime rate. If the prime rate goes up, so will your credit card’s APR. Similarly, if the prime rate goes down, your APR will drop.

How often your interest rate changes will depend on which index rate your lender uses as a benchmark as well as the terms of your contract. As such, the number of rate changes you may experience can vary widely, often multiple times a year.

Details on how a card’s APR may fluctuate over time will appear in a cardholder’s agreement, which you can generally find on the card issuer’s website. If you’re unable to locate it, you can request a copy from your card issuer.

Differences Between Fixed and Variable Credit Card Rates

Both fixed and variable credit card rates have pros and cons. Here’s a look at the major differences with a credit card with a variable or fixed interest rate.

Fixed Interest Rate	Variable Interest Rates
The interest rate usually remains the same	Variable rates change on an ongoing basis
Fixed rates are calculated with payment histories in mind	Rates are based on a benchmark index, like the U.S. primate rate
The card provider is required to let you know when the rate does change (usually for late or missed payments)	The credit card issuer is not required to let you know when rates shift

How Credit Card Interest Rates Are Determined

Credit card interest rates are generally determined based on your creditworthiness — meaning, your payment history and credit score — as well as prevailing interest rates and the card issuer and card type.

For instance, a basic card may have a lower rate than a premium rewards card. Additionally, credit cards can have different types of APRs, such as an APR that applies for credit card charges and another rate for cash advances or balance transfers.

Another factor that can impact credit card rates is promotional offers. Sometimes, credit card issuers may offer low or no interest periods. After that period ends, the card’s standard APR will kick in, and the card’s rate will go up.

Once determined, how and why a credit card’s interest rate changes over time depends on whether the interest rate is fixed or variable. A fixed rate will generally stay the same, though it may increase if payments are late or missed, or if the cardholder’s credit score takes a dive. Meanwhile, variable rates fluctuate depending on current index rates.

Reducing Interest Charges on Credit Cards

Perhaps the easiest way to reduce interest charges on credit cards is to pay your statement balance in full each billing cycle. By doing so, you’ll avoid incurring interest charges entirely.

Of course, this isn’t always feasible. If you may end up carrying a balance and want to decrease how much a credit card costs, there are ways to do so. For one, you can call your credit card issuer and request a lower rate. Of course, for this to be successful, you’ll likely have needed to stay on top of payments and have a history of responsible credit card usage.

Perhaps the surest way to secure a better interest rate on your credit card is to build your credit score. In general, lower interest rates are awarded to those who have higher credit scores and follow the credit card rules, so to speak.

You can build your credit score by making your payments on time, every time, and by keeping your credit utilization ratio (how much of your available credit limit you’re using) well below 30%. You might also avoid applying for new credit accounts, which results in hard inquiries and temporarily lowers your score.

And if you simply feel in over your head with credit card debt and a skyrocketing APR, you may choose between credit card refinancing or consolidation as potential solutions.

Recommended: When Are Credit Card Payments Due

Fixed vs Variable Interest Rate Cards: Which Is Right for You?

In a word, choosing between a fixed rate or variable rate credit card comes down to whether you prefer stability or risk versus reward.

A fixed rate credit card offers a known quantity — a rate that stays the same over time, as long as you pay your credit card bill on time. On the other hand, a variable rate credit card offers an element of risk and reward. If the rate goes up, the cardholder usually spends more money using the card. If card rates go down, however, the cost of using the card usually goes down, too, as interest rates are lower.

Of course, cardholders can largely negate the impact of credit card interest rates by paying their bills in full every month. Of, for those who don’t quite feel ready to tackle the responsibility, there’s always the option of becoming an authorized user on a credit card of a parent or another responsible adult.

The Takeaway

As you can see, it’s important for a number of reasons to know whether a credit card is fixed or variable. Fixed interest rates offer more predictability (though there’s no guarantee they’ll never change), but rates also tend to be higher compared to variable rates. With variable rates, your interest rate will fluctuate over time based on market indexes.

As you shop around for credit cards, interest rate is critical to pay attention to. It can have an impact on your ability to pay your credit card bill and use credit responsibly.

FAQ

Do all credit cards have fixed interest rates?

No, actually most credit cards come with variable interest rates tied to major interest rate indexes. That connection to interest rate changes enables card companies to keep rates competitive on a regular basis.

How do I get notified of an interest rate increase?

By law, credit card companies must notify cardholders in writing at least 45 days ahead of an interest rate change taking effect. Card companies are not allowed to change interest rates during the first year an account is open.

Can I control whether I have a fixed or variable interest rate?

Yes, you can opt for a fixed or variable rate credit card, but know that most credit cards come with variable rates. It’s tougher to find a fixed rate card, but banks and credit unions, which are more likely to offer both, are a good place to start your search.

Photo credit: iStock/AlekseiAntropov

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May

2024

What Is Piggybacking Credit & How Does It Work?

By Austin Kilham | Credit, Financial Independence | Comments Off

When you piggyback on someone else’s credit card, you become an authorized user on their account. Usually, this is in service of establishing credit for the first time or building your credit score.

While piggybacking credit can serve as an important tool as you establish firm financial footing, there are also situations in which it can be risky. Because of this, it’s important to understand how piggyback credit works before using this strategy.

What Is Credit Card Piggybacking?

When piggybacking credit, you become an authorized user, or a secondary account holder. As a secondary cardholder, you may receive your own card and account number. You’ll be allowed to make purchases on the account, but you aren’t necessarily responsible for payment. This differs from joint accounts or for loans that are cosigned, where all parties are responsible for payment.

The primary account holder will be able to view all of the purchases and will ultimately be responsible for making all payments. You’ll likely enter into some sort of agreement with the primary account holder to pay them back for any purchases that you make. You may also agree not to use the account at all.

Piggybacking can refer to other types of debt as well, such as a piggyback mortgage loan. Here, the term is used slightly differently and usually refers to a second mortgage, a home equity loan, or a home equity line of credit (HELOC).

How Does Credit Card Piggybacking Work?

Before explaining how piggybacking works, it’s worth considering why your credit score is important. Your credit score is a three-digit number, typically between 300 and 850, that provides an indicator of your creditworthiness. Credit card companies, banks, and other lenders will look at your score to determine how risky it is to extend credit to you.

Borrowers with the highest scores are seen as the lowest risk. In other words, they are the most likely to pay their bills on time and the least likely to default on their debt. Lenders are often willing to extend the most favorable credit card terms and conditions, including interest rates, to these borrowers.

Individuals with lower scores are seen as presenting higher potential risk. Their low scores indicate that they’ve likely had trouble paying their bills on time in the past. As a result, lenders may be less willing to extend credit. If they do, it may come with higher interest rates to compensate the lender for the increased risk they’re taking on.

If you don’t have a credit history or are looking to build yours, credit card piggybacking can help. That’s because when you become an authorized user on someone else’s card, their credit history for that account has an impact on yours.

When you become an authorized user, that account pops up in your credit report. If the primary account holder has a long history of paying their bills on time or they keep their balance low, this might have a positive effect on your credit. If the account has been open for a long time, say 15 years, it will read on your credit report as a 15-year account. Since length of credit history has an effect on your credit score, this can prove helpful in building your score.

Beware, however, that the impact on your credit score doesn’t always move in the positive direction. If the primary account holder misses payments, for example, the account could have a negative effect on your credit.

Recommended: When Are Credit Card Payments Due?

Does Piggybacking Credit Actually Work?

Piggybacking on a credit card does usually work, but not all of the time. For one, not all credit card companies will report a secondary account holder to the credit reporting bureaus, which include Equifax^®, Experian^®, and TransUnion^®.

What’s more, when you become an authorized user, you’re not necessarily learning to use credit cards responsibly — especially if you’re not using the account or making purchases and having to pay them off on time.

Is Piggybacking Illegal?

Piggybacking is not illegal. In fact, under the Equal Credit Opportunity Act, Congress determined that authorized users cannot be denied on existing credit accounts. This rule applies even if the person being authorized is a stranger.

That said, there are situations in which becoming an authorized user is a deceptive practice and may entice you into some fraudulent situations. (More on this below.)

What Is Person-to-Person Piggybacking?

Person-to-person piggybacking involves becoming an authorized user on the account of a significant other, family member, or friend. For example, young adults often become an authorized user on their parent’s credit card as they seek to build credit for themselves.

Eventually, that young adult will have built enough credit to get a credit card of their own and will be financially stable enough to be able to pay it off on time. At this point, they can decide to drop from their parents’ account.

What Is For-Profit Piggybacking?

Here’s where things get tricky. If you don’t have a friend or family member who’s willing to make you an authorized user on their account, you can seek out the help of a tradeline service. A tradeline is another word for a revolving credit account or installment loan on your credit report.

The tradeline service can match you with a stranger who has good credit, and, for a fee, they’ll add you to their account. The cardholder receives a portion of that money, and you won’t receive a physical card or access to the account.

Tradeline services haven’t been without controversy. For one thing, the practice of purchasing a tradeline can be seen as a method of deceiving lenders into thinking you have better credit than you do. If perceived as fraud, this could have some legal ramifications.

Engaging a tradeline service can also be pricey. Depending on what type of credit you’re looking for, it may cost you anywhere from a few hundred to a few thousand dollars.

It’s also important to understand that you’re only authorized on the cardholder’s account for a short period of time. While your credit may be built in the short-term, when you’re dropped from the account, your credit score may fall as well.

Risks of Credit Card Piggybacking

In addition to the considerations above, there are other risks to be aware of when piggybacking, especially when doing so through a third party.

• You have to give out your private information. This includes your name, address, and Social Security number. The service and cardholder may not have your best interests at heart, and providing them with your data may put you at risk for fraud and identity theft.

• It’s not looked on favorably by lenders. Lenders look to your credit score to learn how well you’re able to manage your debts. If they learn that you’ve used a tradeline service, they may lose trust in you and be less likely to extend credit to you.

• There’s the potential for fraud. Be on the lookout for shady tradeline companies with fraudulent practices. Beware any company that tells you that you can hide bad credit or a bankruptcy using a credit privacy number. The number they provide might actually be someone else’s Social Security number, which would put you at the heart of an identity theft scam.

• It could hurt your credit. You might also be duped into buying an account that’s gone into default, which could hurt your credit.

• There’s the potential for address merging, which is fraudulent. Sketchy companies may also try to use a process called address merging. This involves claiming that the authorized user lives at the same address as the account holder. This is fraudulent and indicates that you are not working with a reliable company.

• You may not give yourself the chance to build healthy financial habits. The best way to build your credit score is to not take on more debt than you can afford and to make payments on time. If you don’t have experience with doing that, you may not learn healthy financial behaviors.

• It could get you in over your head down the road. Building your credit to a point that doesn’t reflect your actual credit activities can land you in hot water if you qualify for a loan only to realize later you can’t actually afford it. You don’t want to end up in a place where you’re wondering if you can pay a credit card with a credit card.

Is Credit Card Piggybacking Right for You?

Credit card piggybacking may be right for you if you’re building credit for the first time and need a way to get your foot in the door.

If you do decide to try piggybacking credit, it may be best to piggyback on the credit of someone close to you. Only turn to tradeline services if there are no other options available, and make sure to carefully vet any options and consider the costs involved.

Alternatives to Credit Card Piggybacking

Piggybacking isn’t the only way to build your credit.

There are many different types of credit cards. Secured cards, for instance, require you to make a security deposit to receive a line of credit, which makes them easier for people with no credit history to qualify for. The credit limit on the card is typically equal to the security deposit amount.

You can also look for tools that allow you to get credit for paying off bills and utilities on time. For example, Experian, one of the major credit reporting bureaus, offers Experian Boost as a free service.

Tips for Managing Your Credit History

As you build your credit history, there are important steps that you can take to help ensure your credit score is as high as possible:

• First and foremost, always pay all or your bills on time.

• Next, you’ll want to have a diverse mix of credit, such as credit cards, student loans, auto loans, or a mortgage.

• Keep your credit utilization below 30%. For revolving credit, credit utilization measures how much of your credit limit you are currently using. You can calculate it by dividing your credit card balance by your loan limit.

• Work to keep hard inquiries at a minimum. When you apply for credit, you trigger what is known as a “hard inquiry.” These can temporarily lower your credit score, especially if there are many in a short period of time.

You’ll also want to be diligent about monitoring your credit report. You can request a free credit report from each of the three credit reporting bureaus once a year. That means, you could be checking your credit report every four months. Look for mistakes on the report and alert the reporting bureaus immediately if you spot anything that’s amiss.

Learning to read your credit report can also clue you into areas of your credit that need your attention and may be dragging down your score.

The Takeaway

Piggybacking credit — becoming an authorized user on another person’s credit account — can be an important tool for building credit. Yet, you only get a benefit with credit card piggybacking if the person’s account is in good standing. If they miss a payment, it could have a negative impact. And if you use a third-party tradeline service, you could be putting your personal information at risk.

Weigh these factors carefully before choosing to build credit using this strategy, and be sure to consider other options.

FAQ

Is piggybacking credit illegal?

Piggybacking credit is not illegal. In fact, Congress has said, under the Equal Credit Opportunity Act, that no authorized users can be denied on existing credit accounts, even if that credit account belongs to a stranger.

How much can piggybacking positively impact your credit score?

According to one recent study, piggybacking can build a credit score by, on average, 22 points.

Does piggybacking credit still work in 2024?

Piggybacking can still work in 2024, though credit reporting bureaus and credit scoring companies may frown on it.

Photo credit: iStock/Morsa Images

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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