In the previously recorded Facebook Live video segment below, Motley Fool analysts Nathan Hamilton and Michael Douglass talk about six things you may not have known about credit cards, including tips on slashing credit card fees and improving your credit score.
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Michael Douglass: Hi, folks! My name's Michael Douglass. I'm joined by Nathan Hamilton. We're a pair ofanalysts here at The Motley Fool, andwe're here to talk about credit cards. Actually,this isn't our first timetalking about credit cards onFacebook, but frankly,last time went so well that we decided to do it again. If you have questions, we would love to hear them, so just reply in the comments section. We'll do our best to answer whatever questions come our way, or at the very least, get in touch with you to pass along what we have. But first off, we thought we'd start with six things you probably didn't know about credit cards.
No. 1, Mr. Hamilton. The fact is, youapply for a bunch of credit cards, it won't tank your credit scorepermanently. That's the important word here, "permanently."
Nathan Hamilton: Yeah,because a lot of people do avoid applying for new cards, thinking, "OK, the credit score dropped from more hard inquiries, that'sgoing to permanently impair my credit score." But really, when it comes down to it, theopposite can actually take place, because when you do apply for a credit card, no doubt about it, your credit score isgoing to take a small,temporary, short-term hit. But what's happening is,if you're paying your bills on time andyou're establishing a better payment history, if you're not overextending yourself with that debt, those are two factors that have a huge weight and influence in yourFICO score. If you're able to open a new card that, in the long term, youestablish a better payment history of managing debt, your FICO score canactually improve from applying for a new card.
Douglass: Andone of the big things we should talk about here is,when you think about your FICO score, the twolargest components are,35% of your FICO score is payment history. Basically,do you pay bills on time? Do things go to collections? Should be yes and no. Then 30% iscredit utilization. That'show much of the debt available to youat any given time you're using. Opening more cards, long-term, if doneresponsibly, can actually be a net plus. Let's say you spend $500 a month oncredit card bills,and you pay it off each month. Yourcurrent credit card has a $1,000 limit. You're at50% utilization, because $500 is 50% of $1,000. Youopen another card with another $1,000 and you shift half that $500, $250 over to it, you're at25% utilization across the board. That actuallyreduces thatutilization, which boosts that part of your credit score. So that can actually be a long-term win,if managed well.
Hamilton: Yeah. You hit some very good points there. I thinkthe moral of the story is don'tnecessarily be afraid ofapplying for a card just because you're worried about the impact to your credit score,because there are some favorable advantages,as we both covered here, that can increase yourcredit score over the future. Don't shy away from it. Don't gocrazy with it, of course, but it'sdefinitely something that people shouldn't be as concerned about.
Douglass: Yeah. No. 2 -- this one was a real surprise for me -- Americans aren't actually as bad at managing their credit card debt as we're all led to believe. This is something that I would blame a little bit on the financial media, in general, because people say, "Gosh, $779 billion in credit card debt!" You hear that number and you're like, "Gosh, we're in a lot of debt."
Hamilton: "We're screwed."
Douglass: [laughs] Right, we can't win. But it turns out, actually, that that number is both more complex and also not quite as bad as it seems.
Hamilton: Yeah. Big financial numbers will always shock people, but if you look under the hood -- and we've talked about this before -- at how people are managing their debt, there are signs that actually point toward people getting better at managing debt, and part of that iscreditutilization ratios -- like you mentioned before, the amount of debtwe have available andwhat we're actually borrowing -- aredecreasing over the past decade. They've almost halved themselves down to23%. Now, that's coming off thefinancial crisis,where a lot of people were over-leveraged. But itdoes show a positive sign of,people are managing their debts better.
Douglass: Andto be clear, credit utilization is down fromabout 28% during the financial crisis, to about 23% today. That's about a quarter. Then, also90-day delinquency has been cut almost in halfin the pastdecade to 7.1%. That's huge. Thatbasically means that people have more credit available to them, and they're using less of it. They're usingsome more on an objective basis, like,instead of $1, they're using $2,for example. But also, they're better at managing itbecause the delinquencies are going down. That's a really good sign.
Hamilton:Yeah.I'd like to dive into the data even further. Lookingbeyond averages of every single American,and more look at it of people carrying debt and incurring interestcharges, what are theirdelinquencyrates? What are their debtbalance is doing? What are their utilization ratios doing? Becauseyou may find a different story, because youlook at it overall, itsuggests we're doing better atmanaging debt, but there may be pockets where people maybe needa little bit more help.
Douglass: Yeah, absolutely. No. 3.
Hamilton: I like this one a lot.
Douglass: [laughs] Yeah, thisone feels like a credit card hack. Youdon't need to pay every late payment fee. Take it away.
Hamilton: Yeah. Aspart of legislation coming outof the financial crisis,there were definitely more consumer-friendly behaviors that wereimplemented with credit card companies.
Douglass: Which,as consumers, we're veryexcited about. Also,at The Motley Fool,we are consumer advocates, sowe very much like things that are pro-consumers.
Hamilton: Yeah, and we hate fees, too.
Douglass: So win-win.
Hamilton: So,part of the legislation says that if you incur a late payment fee,you can waive at least one late payment fee each year -- that's your right as acard holder. Now, credit card companies won't come out and say that, so, of course, it's on you to call up yourissuer and say, "Sorry,I'm missed a payment, let's go ahead and waive it." Butdon't let anybody tell you different, this is something you have as a right as a cardholder, to beable to waive that late payment fee.
Douglass: Yeah. Of course, on the flip side, also keep in mindyour credit score. There's nofaster way to tank it than toactually miss a payment. This isn't the one that gets waived, butsomething else. That'ssomething to always keep in mind. We're not saying here, "Don't make your payments." We're saying, "Get this one waived if you make a quick call." The wayI like to think about this issort of like paying yourself a salary. Who likesnegotiating your cable bill, orcalling your credit card company to try to get a payment waived? But if for 10 minutes of hold time andfive minutes negotiating, so 15 minutes, you're able to save $20,I don't know about you, but I don't make $80 an hour, so that's a lot of money I'mputting back in my own pocket that is a relatively low time-spent cost for me.
Hamilton: Yeah,it's definitely worth it. Getting back to what you mentioned before, theimpact your credit score, it'simportant to realize that if you're late by less than 30 days, that's not reported bymany card issuers to the creditreporting bureaus, and that's not impacted, that's not affecting yourcredit score. Once you go beyond 30 days, if you are 30 days late, boom,that's where you have the big impact, and it'ssomething you want to be aware ofin addition to the fee.
Douglass: Right. Cool. Let'shead over to No. 4. This one really surprised me.
Hamilton: Another fee one.
Douglass: Yeah. Andthis is something I plan to donow that I'm aware it's a thing we can do. You can likely get the annual fee waived, orpotentially secure a lower APR.
Hamilton: I'm with you, I'm in the same boat.I typically go for a no-annual-fee credit cards,but there are some that I've had over my lifetime as a borrower that have incurred annual fees, andI've actually closed down the accounts to avoid it. But I'm actually going to change that in the future, becausesome recent research we came across fromBankrateshows that 80% -- four in five card holders -- that actually ask for an annual fee to be waived receivesome sort of leniency. Now, that's either waiving the fee entirely, or areduced annual fee. That's simply by calling up their credit card company. Maybeif you're late on a payment and have that 10 minutes --
Douglass: Maybenot so great during that moment. Maybe that's a different call. "Oh, while you're on the phone, can I also ... "
Hamilton: Yeah, "Waive these two fees for me." So, yeah,the moral of the story is,you're likely to get it if you do ask for it. Also, on reducing your APR,if you do ask for that,research suggests that the odds are in your favor of getting a reduction.
Douglass: 69% ofpeople who ask for it got it. That'sincredible. Listen, life happens. A medical bill, a surprise,something that you had to put on plastic because you're in a spot where you have to --if you're able to reduce that APR, thatmakes that financial shock not as bad and enables you to pay it off faster. Younever want to carry a credit card balance, ever.
Hamilton: Yeah. Assoon as you can get an APR down if you are in debt, you're paying off your debts faster, you're saving more, you're investing sooner, you'rereaching your retirement goals a lot faster, which is ultimately the goal.
Douglass: Yeah. No. 5, howcredit card companies make money.
Hamilton: This isactually going off of the previous one about getting anannual fee reduced. It's important to understand how credit card companies make money. When you'recalling to get your annual feehopefully down to $0, you can plead your case. And knowing how they make moneyis important because,No. 1, interest charges. If you look athow much card issuers made in 2016, this was $63.4 billion ininterest charges.Interchange income, which is essentially the fee that merchants payeach time you swipe the card, came in at $42.4 billion. Third one,cash advance fees,which are still very high $26.6 billion. So, if you arecalling your card issuer to say, "Iwant to have my annual fee waived," to make your case you can say, if you're in debt, or if you'reincurring interest charges, you can say, "I've beenpaying these interest charges,you guys are making money off of me,perhaps you can workwith me some to lower the fees." Or, if you're on the other side of the ball and you don't payinterest, you pay your bills monthly, you just earnrewards, if you are frequentlyusing your credit card, the issuer isreceiving that interchange incomefor every single swipe. Generally, that's about 2%of the transaction, so you could make the case and say, "I've beenusing my card frequently for six months, one year, five years, whatever."
Douglass: "This is wortha lot more than that $50 annual fee you're getting, trust me. You want to keep me happy and keep me making you money." It's a win-win. If you're not paying fees, and they're getting their interchange fees, they'remaking a buck, you're making a buck,it's not so bad. No. 6 --again, very muchsomething that is not in keeping with the general thing people hear. The fact is, points cards may not be the right fit for you. Again,everyone is always talking about, "I gotthese two plane tickets with my points," or "I got thiscool Caribbean vacation with my points." So,I think people have this sense that they need points.
Hamilton: Yeah. It'simportant to put it in context. Itdepends on the card and depends on the person,so many different variables. But the reason I mention whypoints cards may not be a good fit for you is,generally, the conversion values, if you'regoing for something other than travel or redeeming points for cash back or a laptop or merchandise, gift cards, theconversion rate of each point to what it's worthfor that redemption istypically penalized with a very low rate. You canlook at a cashback card, many cashback cards offer1.5% to 2% cashback. Many points cards,when you redeem them for similar cashback, merchandise, gift cards, areactually below 1%. If you look at it, we'regoing to get into it here and saya little bit about card companies, butthe reason why points were initially used by credit card issuers is,it obscures the actual value, it makes it easier for consumers to not know what they convert to.
Douglass: Yeah. I just got 100,000 points.
Hamilton: It's worth $1.
Douglass: Right. That's the thing. Whatmatters is not how many thousands of points you got,but what that actually converts to in hard currency.
Hamilton: Yep. Andhere's the most telling sign: If you look at points cards -- if you go to their offer pages and look at it -- typically, you're not going to see what those conversion values are. You have to go to a third-party website who's done the research on your behalf to figure out, this iswhat it's worth for agift card atAmazon, this is what it's worthfor a cashback statement credit,this is what it's worth for travel, whereyou do get a goodyield, buteverything else, here's what you're actually getting. Youwon't see that on the marketing page for a credit card, which,you want to look at that and say, what else is there to look at thatsomebody might not be telling me?
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