Photo: Flickr/Jason Hargrove
After the CARD Act regulations squeezed banks’ profit margins, some abusive practices were ended while new loopholes opened.Specifically, underwriting, which is the process issuers and banks use to determine what kind of financial risk you pose, whether or not to lend to you, and on what terms, became a whole lot trickier.
Credit underwriting has always been a closely-guarded secret, but educated consumers can use these financial tricks to make their credit cards work for, instead of against, them.
Here are three things your credit card company doesn’t want you to know, and how to use it to your advantage:
- You can influence your credit limit. The credit limit you are offered is influenced by two factors: your income and credit score. While your income gives lenders a sense of how much credit you are likely to charge, your credit score suggests how likely you are to pay back your debts. In this formula, your credit score is weighted more because credit card companies are risk-averse. For instance, a high income and poor credit score is likely get a lower credit limit than a low income with excellent score.
- Advantage: If you have great credit, it could be worthwhile to request a credit line increase. Increasing your credit limit can lower your credit utilization rate, which benefits your credit score. Be warned that you may be subject to a hard inquiry, which knocks a few points off your score in the short term. If you still need to build your credit before requesting a credit line increase, use CreditKarma.com to check your credit score for free and use the Free Credit Report Card to see what actions you can take to improve your credit.
Your 0% intro APR could cost you. 0% intro APR cards can save significant interest on big-ticket purchases and balance transfers for a promotional period of six or more months. However, if you make a late payment during the promotional period, the credit card company can reset your 0% APR to the default interest rate. The company can even tack on retroactive interest charges, which is the interest that would’ve accrued on your entire balance during the promotional period. Also, if the promotional period ends and the balance isn’t paid in full, you can also be retroactively charged interest on your entire balance.
- Advantage: Plan and prioritise your monthly payments to make sure you are on track to pay off your balance before the promotional period ends. Also, set up auto pay or text /email reminders to make sure you never miss a payment.
We don’t need you to carry a balance. Many consumers believe that carrying a small balance on their credit card month-to-month is good for their credit. But this is a damaging myth: lenders and banks don’t see this as a sign of active use or creditworthiness, and carrying a balance doesn’t help your credit score. In fact, it increases your debt through interest charges and can hurt your credit score if your total card balances are over 30% of your total credit limits.
- Advantage: Never leave a balance month-to-month if you can help it. You can show active credit use by making a small purchase, like a tank of gas or a grocery run, every month and paying it in full by the end of the month. That’s enough credit use to build your credit, as long as you keep your balances well below 30% of your total credit limits and consistently pay on-time.
On a final note, here’s one important tip that credit card companies don’t want you to know that can certainly help cardholders: it doesn’t hurt to ask.
If you want to negotiate the terms of your credit card or contest a fee, simply call up your credit card company and politely request it. Companies are often willing to compromise if you pay on-time and manage your credit card wisely.
Here are a few examples of what consumers can negotiate: you can ask to have an annual fee removed, lower your card’s interest rate, remove a late fee, change your payment date, and raise your credit limit. Once you’re in contact with your company’s customer service, also be armed with knowing your credit score and how long you’ve been a customer.
Remember, credit card companies will fight to keep customers from going to the competition. Even the best credit card companies aren’t necessarily looking out for you, so be proactive in getting what you want out of your plastic.
Justine Rivero is the Credit Advisor for CreditKarma.com, the pro-consumer credit advocate that helps
more than 3 million consumers realise the everyday cost savings of having great credit health.