Use your credit card right, and you could build the kind of credit history that saves you thousands of dollars throughout your life. On the flip side, misusing your credit card is a treacherous, slippery slope into debt and credit unworthiness.
Maybe you were raised with a fear of credit cards that you need to learn to manage, or maybe you’re trying to pass on healthy credit-building habits to your newly card-holding kids. Whatever your circumstances, here’s what all first-time credit cardholders should understand about their plastic, as well as a few things longtime cardholders would do well to remember.
You may be required to make a deposit
If you’re opening a card without a credit history, or with too low a score, you may need to open a secured credit card for the time being. Unlike a typical credit card, it requires an up-front deposit that usually matches your credit limit. Not all secured credit cards are created equal, so here’s what to look for if you’re considering applying for one of them.
You should stay way under your credit limit
This is the number one piece of wisdom I wish someone had told me before I started putting my first credit card to use. Although I never maxed out a card, my credit score would have been better if I had been savvier with my spending.
The rule of thumb is to not spend more than 30% of your credit limit, with some experts even suggesting a threshold as low as 10%. This percentage is known as your credit utilization rate, and it makes up 30% of your credit score. In most cases, a lower utilization means a higher credit score—with 0% utilization being the exception. On that note...
Don’t be afraid to swipe
Yes, you want to keep your credit utilization lower than 30%. But avoiding using your credit card altogether is also a mistake. In order to build a strong credit score, lenders and credit card issuers need to see that you’re actually using credit. If there’s no credit history for the credit bureaus to scrutinize, you’re damaging your credit health. (This is also the reason why it pays to always wait until your statement date to pay off your balance.)
Another important reminder: Even if you know you’ll never use it again, you should probably never cancel a credit card. You might be intimidated by credit cards’ high interest rates, but you’ll never have to pay them as long as you pay your credit card bill on time and in full each month. So...
Always pay off your card in full
You know this one. It’s simple, but crucial. In order to avoid facing those intimidating interest rates, damaging your credit score, or descending into a life of debt, always pay your credit card bill on time and in full.
Play it safe and set up automatic payments now. And if you can at all avoid it, don’t make a purchase with credit if you don’t expect to be able to pay it off at the end of the month (or before you start getting hit with interest charges).
Find the best card for you
Once you get the hang of using your card regularly and always paying off your balance every month, there’s no reason you shouldn’t have a rewards card. There’s no shortage of rewards programs out there, even if you’re hesitant—Discover, for instance, offers a secured credit card that still offers rewards.
Take some time to shop around and find a card that best suits your lifestyle. Someone who spends a lot on gas and groceries should look for a cash preferred card, while frequent flyers need to get their hands on a travel-specific rewards card.
Research the best credit card for you with best-of lists on sites like Credit Cards Explained here. Finally, here’s what else you need to do before you swipe your new plastic for the first time.
