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Credit cards can be very enticing, with welcome offers luring you in with the promise of thousands of points you can redeem for travel or cash back. But credit cards can also be useful financial tools. They can provide convenience, security and help you build credit all while you earn rewards like points, miles and cash-back benefits that can help you save money.
But intertwined with all the benefits, perks and bonuses are some surprises that can catch you off guard and potentially hurt your finances. Irresponsible credit card use and misunderstanding the terms and conditions of your card can offset all the perks.
"There's a saying in the industry that credit cards are like power tools — they can be very useful, but in the wrong hands, they can be very dangerous," says Ted Rossman, credit card senior industry analyst with Bankrate.
Here are six credit card surprises to keep on your radar.
Promises of tens of thousands of points or miles just for opening a new credit card account sounds simple, but there's more to the story. "Credit card sign-up bonuses can be extremely lucrative, but be sure to review the fine print," cautions Rossman.
Typically, you need to spend thousands of dollars within the first few months of opening your account in order to earn the promoted bonus.
"The key is to maximize money you would have spent anyway," says Rossman. For example, if you are planning to buy new kitchen appliances, furniture or book a pricey vacation, it could be a good time to open a new card with a generous welcome offer.
"You don't want to overspend, but you also don't want to miss the bonus threshold and forfeit those potential points or miles," continues Rossman. Keep track of the spending threshold and the deadline. If you don't reach the spending requirement, you won't be awarded the bonus. One more caveat Rossman points out: If you return an item, that spending probably won't count.
You may be very familiar with your credit card's grace period, which can span up to two months from when you make a purchase to the due date of your account statement.
You may not know that cash advances are not subject to a grace period, and interest begins to accrue immediately.
"Credit card cash advances are almost always a bad idea because the interest rate tends to be higher than on regular purchases (often something like 25% instead of 16%), interest starts accruing immediately and there's usually a separate cash advance fee as well, most commonly 5% of the amount you take out," Rossman explains.
Beyond the hefty interest and fees, you may not even realize you're taking out a cash advance. For example, if you use your credit card for ATM withdrawals, gambling purchases, bail bonds, wire transfers, traveler's checks and money orders, there's a good chance it will count as a cash advance, Rossman says.
Furthermore, Rossman says you may not realize the convenience checks that issuers sometimes send are often treated as cash advances. "So you may think you're doing something smart by paying your rent with a convenience check, but that could really cost you in cash advance fees and interest," he says.
You may have added your children, significant other or even a business partner to your credit card account as an authorized user, but that action can have serious implications. Even though they may promise to pay you back for any purchases they make on your account, the reality is that you and you alone are responsible for their purchases on your account.
"If you add someone to your credit card account as an authorized user, you're legally responsible to pay for those transactions — not them," stresses Rossman. "It's your account."
"For example, you probably don't want your ex-husband, your ex-girlfriend or your ex-business partner to still be on your credit card as an authorized user," Rossman quips. "And while it could make sense to have your kids as authorized users for a while, at some point, you'll probably want to cut that tie."
You may be entitled to special offers through your credit card account like bonus spending categories, free memberships to subscription services or complimentary shopping incentives. Often, you must opt in to receive these special offers; you're not automatically enrolled.
"There are popular cards like the Chase Freedom Flex℠ and the Discover it® Cash Back that rotate their 5% cash back categories every quarter. You need to activate the promotions in order to earn that elevated rate," explains Rossman.
For the Discover it® Cash back, enroll every quarter to earn 5% cash back on up to $1,500 in purchases made in various categories throughout the year, 1% thereafter. Similarly with the Chase Freedom Flex, you can earn 5% cash back on up to $12,000 spent in the first year on gas station and grocery store purchases (excluding Target and Walmart).
Other card-linked offers such as Amex Offers and Chase Offers are digital coupons that work similarly: You need to pre-select the offer and then redeem according to the terms and conditions, he says.
There may be opportunities to garner a higher earnings rate on your rewards credit card account when you have a bank account with your credit card issuer. Consider Bank of America's Preferred Rewards program, which is an example of how loyalty can pay off.
If you have at least $20,000 in eligible deposits or investments with Bank of America/Merrill Lynch, your Bank of America credit card rewards will be worth 25% more, Rossman explains. If you have $50,000 in eligible deposits or investments, your rewards bonus is 50% more. And for the highest level of earning, with $100,000 or more in eligible deposits or investments, your rewards will be worth a whopping 75% extra, he says.
"This is a case in which centralizing your accounts and demonstrating loyalty can be well worth it," Rossman adds. "Take the Bank of America® Unlimited Cash Rewards credit card for example. Its standard 1.5% cash back rate is pretty ho-hum. But if you get the 75% bonus, then it's 2.625%, which puts it among the very top contenders."
Credit cards affect your credit score in many ways. "From the actual credit card application itself to whether you carry a balance, pay it off on time and how much of the credit limit you use," says Rod Griffin, senior director of public education and advocacy for Experian. But what may surprise you is how credit card inactivity can impact your credit score.
In order for your credit cards to be reflected in your credit score, you need to show regular account activity. If you don't use a card for several months you might see an unexpected negative impact on your credit scores, Griffin says.
"Extended periods of inactivity are an often overlooked or unknown threat to your credit scores," he points out. Credit scores not only require that an account be present in a credit report, but Griffin explains that there needs to be consistent activity in that account for it to be reflected in your score.
"If you set aside a card and don't use it, eventually it won't be taken into account and your score could drop as a result," he says. To ensure an account is helping your credit score, make a small purchase every month and pay it in full by the due date. This action will lift your score.
If you hold an inactive credit card, there's a good chance the issuer may close the account if it hasn't been used in a while. "When this happens, it reduces the amount of credit available to you," Griffin says. "This can negatively impact your credit score because it will likely increase your credit utilization rate, which is the second most important factor in credit scores."
Information about the Bank of America® Unlimited Cash Rewards card, Chase Freedom Flex℠ has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.
For rates and fees for the Discover it® Cash Back, click here