4 Ways a 0% APR Credit Card Can Actually Hurt Your Credit

It’s hard to argue against the appeal of zero interest credit cards. You just transfer your credit balance from a high-interest card and boom: free money!

But not so fast. A 0% APR credit card offer can hold great appeal, but if you’re not careful, the process could actually hurt your FICO credit score and leave you with greater debt than before. Here’s how:

It could increase your credit utilization

To understand how a no interest credit card may hurt your credit, you need to understand how your FICO score works. The top factor is your on-time payment history, worth 35% of your score. The next most important factor is your credit utilization, worth 30% of your score. Here’s where a transfer of a balance from a high-interest card to a no-interest card can hurt.

FICO looks at your ratio of debt to available credit. Add up all the credit limits of all your cards and subtract the amount of credit used; that’s your credit utilization ratio. If you’re using 30% or less of your total available credit, that’s good (10% or less is even better for your credit rating).

So if you move a $5,000 balance from a high-interest credit card with a $20,000 limit to a no interest card with a $10,000 limit, your credit utilization will double from 25% to 50%.

Nerd note: When you transfer a balance to a new card, don’t close the old account. Keep it active, even if it goes unused. That keeps your credit utilization lower and length of your credit history (worth 15% of your FICO score) higher.

A new credit card will hurt your credit

Bad news: Evaluation by the issuer of the new card includes a “hard inquiry” of your credit history, which signals you’re looking to take on new debt. The number of new inquiries into your credit history affects about 10% of your FICO score.

Good news: Over time, a new card can help your credit score by diversifying your credit line. It’s also helpful if you keep your balances low and always — always — pay your bills on time.

Check beyond the teaser rate

Remember a zero interest card is a promotional offer. That means it ends, usually between six months and 15 months later. Then interest rates, often in the double digits, kick back in again. Is the new rate lower than your old rate? Will you reasonably be able to pay down your balance before the higher interest rate begins?

0% on purchases is still more debt

OK, so you don’t pay any interest for a limited time on new purchases. But you are still taking on new debt. Zero percent offers are great as tools to help in the short run, whether to temporarily cover a purchase or help double-down on paying off a high balance.

If your spendthrift ways got you into debt troubles in the first place, then a zero interest card can be an avenue for even more damage. Handle with care.

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4 Ways a 0% APR Credit Card Can Actually Hurt Your Credit

It’s hard to argue against the appeal of zero interest credit cards. You just transfer your credit balance from a high-interest card and boom: free money!

But not so fast. A 0% APR credit card offer can hold great appeal, but if you’re not careful, the process could actually hurt your FICO credit score and leave you with greater debt than before. Here’s how:

It could increase your credit utilization

To understand how a no interest credit card may hurt your credit, you need to understand how your FICO score works. The top factor is your on-time payment history, worth 35% of your score. The next most important factor is your credit utilization, worth 30% of your score. Here’s where a transfer of a balance from a high-interest card to a no-interest card can hurt.

FICO looks at your ratio of debt to available credit. Add up all the credit limits of all your cards and subtract the amount of credit used; that’s your credit utilization ratio. If you’re using 30% or less of your total available credit, that’s good (10% or less is even better for your credit rating).

So if you move a $5,000 balance from a high-interest credit card with a $20,000 limit to a no interest card with a $10,000 limit, your credit utilization will double from 25% to 50%.

Nerd note: When you transfer a balance to a new card, don’t close the old account. Keep it active, even if it goes unused. That keeps your credit utilization lower and length of your credit history (worth 15% of your FICO score) higher.

A new credit card will hurt your credit

Bad news: Evaluation by the issuer of the new card includes a “hard inquiry” of your credit history, which signals you’re looking to take on new debt. The number of new inquiries into your credit history affects about 10% of your FICO score.

Good news: Over time, a new card can help your credit score by diversifying your credit line. It’s also helpful if you keep your balances low and always — always — pay your bills on time.

Check beyond the teaser rate

Remember a zero interest card is a promotional offer. That means it ends, usually between six months and 15 months later. Then interest rates, often in the double digits, kick back in again. Is the new rate lower than your old rate? Will you reasonably be able to pay down your balance before the higher interest rate begins?

0% on purchases is still more debt

OK, so you don’t pay any interest for a limited time on new purchases. But you are still taking on new debt. Zero percent offers are great as tools to help in the short run, whether to temporarily cover a purchase or help double-down on paying off a high balance.

If your spendthrift ways got you into debt troubles in the first place, then a zero interest card can be an avenue for even more damage. Handle with care.

---

Image via iStock.

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4 Ways Having No Credit History Can Hurt You

Whether it’s a landlord reviewing your rental application or a bank thinking about giving you a loan, your credit history will stand at the center of many important decisions. If you haven’t taken the time to build your credit, it’s high time that you do so. Here are four reasons why.

Bad credit card deals

Qualifying for the best credit cards will be nearly impossible if you haven’t established your credit history. This means you’ll miss out on the best interest rates and rewards. In addition to saving you money and providing you with a wide range of perks, the advantages of good credit cards will encourage you to keep using your plastic, which will boost your credit score that much more if you continue making payments on time and in full.

For people with no credit history, secured credit cards are solid first-time credit cards and can help you improve your credit score. Once you’ve built out your credit history, chances are good you’ll qualify for an upgrade to an unsecured credit card.

Difficulty getting a loan

Whether it’s a car loan or a mortgage, lenders will be reluctant to extend credit your way if they have no insight into your credit history. As a result, you’ll either miss out on loans altogether or be offered loans with high interest rates. Over the lifespan of a 30-year mortgage, for example, a high interest rate could cost you tens of thousands of dollars.

Trouble renting an apartment

The rental market can be fiercely competitive, especially in booming cities like San Francisco. With so many applications to sort through, landlords want to find renters with the strongest credit scores, which suggests a certain level of financial trustworthiness. If you have no credit history, it’ll be hard for them to make a judgment call on your application, which could result in a higher security deposit or having to find a co-signer for your lease.

Expensive car insurance

Like landlords, car insurance companies like to evaluate the financial reliability of their potential customers. They want to know whether you’re going to end up costing them money. Car insurance companies determine this by using credit-based scores to help assess risk. Though this practice is prohibited in California, Hawaii and Massachusetts, the majority of Americans looking for car insurance will qualify for better rates if they have a strong credit history.

From becoming an authorized user on someone else’s credit card to using your secured card responsibly, there are several ways to build a credit history if you haven’t done so yet. The name of the game is remembering to pay your bills on time and in full and to monitor your credit score so that once it approaches 700, you can think about applying for an unsecured card.

The post 4 Ways Having No Credit History Can Hurt You appeared first on NerdWallet Credit Card Blog.

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4 Ways Having No Credit History Can Hurt You

Whether it’s a landlord reviewing your rental application or a bank thinking about giving you a loan, your credit history will stand at the center of many important decisions. If you haven’t taken the time to build your credit, it’s high time that you do so. Here are four reasons why.

Bad credit card deals

Qualifying for the best credit cards will be nearly impossible if you haven’t established your credit history. This means you’ll miss out on the best interest rates and rewards. In addition to saving you money and providing you with a wide range of perks, the advantages of good credit cards will encourage you to keep using your plastic, which will boost your credit score that much more if you continue making payments on time and in full.

For people with no credit history, secured credit cards are solid first-time credit cards and can help you improve your credit score. Once you’ve built out your credit history, chances are good you’ll qualify for an upgrade to an unsecured credit card.

Difficulty getting a loan

Whether it’s a car loan or a mortgage, lenders will be reluctant to extend credit your way if they have no insight into your credit history. As a result, you’ll either miss out on loans altogether or be offered loans with high interest rates. Over the lifespan of a 30-year mortgage, for example, a high interest rate could cost you tens of thousands of dollars.

Trouble renting an apartment

The rental market can be fiercely competitive, especially in booming cities like San Francisco. With so many applications to sort through, landlords want to find renters with the strongest credit scores, which suggests a certain level of financial trustworthiness. If you have no credit history, it’ll be hard for them to make a judgment call on your application, which could result in a higher security deposit or having to find a co-signer for your lease.

Expensive car insurance

Like landlords, car insurance companies like to evaluate the financial reliability of their potential customers. They want to know whether you’re going to end up costing them money. Car insurance companies determine this by using credit-based scores to help assess risk. Though this practice is prohibited in California, Hawaii and Massachusetts, the majority of Americans looking for car insurance will qualify for better rates if they have a strong credit history.

From becoming an authorized user on someone else’s credit card to using your secured card responsibly, there are several ways to build a credit history if you haven’t done so yet. The name of the game is remembering to pay your bills on time and in full and to monitor your credit score so that once it approaches 700, you can think about applying for an unsecured card.

The post 4 Ways Having No Credit History Can Hurt You appeared first on NerdWallet Credit Card Blog.

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How Library Fines Can Hurt Your Good Credit

You likely know some of the most obvious things that can send your credit score into a tailspin — filing for bankruptcy, having your home foreclosed on, habitually being late on payments and not returning a library book on time. Wait, what does the library have to do with your credit? A lot, actually.

Read between the lines

So you checked out a book from your local library and somehow lost track of the due date. Come the day that you’re supposed to turn in the novel, your borrowed literary work is still sitting on your counter and missing from its normal spot on the local librarian’s shelf. The library subsequently charges you a late fine, but since the amount is so small, you decide not to pay it. But before you know it, that late library book fine turns into a financial nightmare as your good credit is being threatened with a call from a collection agency. How did that happen?

Certain libraries are turning to collection agencies to recover the outstanding late fines that bookworm patrons aren’t paying. Going to collection — regardless of whether it’s for a library book or something else — looks bad on your credit report. The collection agency may report your unpaid fee to a credit-reporting agency, which is where your credit score and your late library book cross paths. If this happens to you, you could receive added penalties from the collection agency as well as a hit to your good credit, all in addition to that minor fee you shrugged off to start the whole situation.

Moral of the story

What can you learn from this tale of library fines gone wrong? As you carry on in your everyday life, don’t just make good on payments you assume will affect your credit. As you can see, it’s not just credit card bills that people with good credit need to be punctual on in order to keep their credit standing. It’s library fines, parking tickets and a number of other fees as well.

Try to avoid racking up such penalties in the first place. If you are faced with a charge, pay it promptly (one of the keys to good credit in general is making payments on time, as it’s an indicator of your creditworthiness). If you don’t do so, you could end up with a lower credit score, which may mean you’ll be turned down for future loans or credit cards for people with good credit that you apply for.

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Library patron image via iStock.

The post How Library Fines Can Hurt Your Good Credit appeared first on NerdWallet Credit Card Blog.

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How Library Fines Can Hurt Your Good Credit

You likely know some of the most obvious things that can send your credit score into a tailspin — filing for bankruptcy, having your home foreclosed on, habitually being late on payments and not returning a library book on time. Wait, what does the library have to do with your credit? A lot, actually.

Read between the lines

So you checked out a book from your local library and somehow lost track of the due date. Come the day that you’re supposed to turn in the novel, your borrowed literary work is still sitting on your counter and missing from its normal spot on the local librarian’s shelf. The library subsequently charges you a late fine, but since the amount is so small, you decide not to pay it. But before you know it, that late library book fine turns into a financial nightmare as your good credit is being threatened with a call from a collection agency. How did that happen?

Certain libraries are turning to collection agencies to recover the outstanding late fines that bookworm patrons aren’t paying. Going to collection — regardless of whether it’s for a library book or something else — looks bad on your credit report. The collection agency may report your unpaid fee to a credit-reporting agency, which is where your credit score and your late library book cross paths. If this happens to you, you could receive added penalties from the collection agency as well as a hit to your good credit, all in addition to that minor fee you shrugged off to start the whole situation.

Moral of the story

What can you learn from this tale of library fines gone wrong? As you carry on in your everyday life, don’t just make good on payments you assume will affect your credit. As you can see, it’s not just credit card bills that people with good credit need to be punctual on in order to keep their credit standing. It’s library fines, parking tickets and a number of other fees as well.

Try to avoid racking up such penalties in the first place. If you are faced with a charge, pay it promptly (one of the keys to good credit in general is making payments on time, as it’s an indicator of your creditworthiness). If you don’t do so, you could end up with a lower credit score, which may mean you’ll be turned down for future loans or credit cards for people with good credit that you apply for.

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Library patron image via iStock.

The post How Library Fines Can Hurt Your Good Credit appeared first on NerdWallet Credit Card Blog.

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How To Know If a Bad Credit Credit Card Is Right for You

If you have a low credit score, you may think you have to take what you can get when it comes to credit cards. In reality, however, there are a number of credit cards for people with bad credit. No matter what your credit score, it’s a bad idea to apply for the first credit card offer that comes along.

Is the bad credit credit card you’re considering the right one for you? Ask yourself these four questions before you apply:

Is it secured or unsecured?

Most credit cards you encounter are unsecured. Secured cards are similar — in that you can use them to make purchases and receive a monthly bill — but opening the account requires a few extra steps. You’ll make a deposit with your lender, and then you can use the card to borrow as normal — usually up to the amount of your deposit.

If you can get an unsecured card, you should. But if you qualify only for secured cards, ensure that the issuer will transition you to an unsecured card after you’ve built a solid payment history.

What’s the interest rate?

If you have poor credit, the cards available to you will have interest rates on the higher side, but that doesn’t mean you have no choice at all. Compare the rates for available cards to get the best deal. And remember that your interest rate matters only if you run a balance on the card. If you already have poor credit, this is the last thing you should be doing.

Are there rewards?

Most rewards credit cards are out of reach for people with bad credit, but this isn’t always the case. If you want rewards, you may have a few card options. Just keep in mind that many bad credit credit cards with rewards also have an annual fee. Weigh the amount you’re likely to earn against the price you’ll pay for the card before springing for a rewards card.

Are there benefits for using your credit responsibly?

Beyond cash back rewards, some credit cards for poor credit offer perks that can help with credit repair. Look for cards that recognize on-time payments with credit limit increases. Having a higher credit limit can lower your credit utilization ratio, which can then give you a credit score bump — as long as you don’t take advantage of the opportunity to spend more.

The bottom line

Bad credit credit cards may not have all the bells and whistles that credit card commercials have taught you to expect, but they’re still credit — and credit is important. No matter what card you qualify for, use it as an opportunity to build up your score by making full, on-time payments. And when you do qualify for the best credit cards, don’t necessarily close your old one. Having a long, responsible history with a credit account works wonders for your credit score.

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