Having a credit card is a big responsibility, and it’s one that shouldn’t be taken lightly. A credit card can help you build your credit score so you’ll have excellent credit when you need it, but we all know that credit cards can also lead to long-term debt and damage to your credit score that can take years to fix.
With that in mind, it’s smart to have a plan in place before you begin using your new credit card. This plan should help you maximize the benefits of credit, including credit-building and rewards, without putting your finances at risk.
If you’re a new credit card user and you want to use credit as a tool to build the life you want, read on to learn six steps you’ll want to take right away.
1. Set up auto-pay
Building credit is easier when you know about the factors that make up your credit score, the most important of which is payment history. This factor makes up more than one-third of your FICO score. As a result, paying your bills late (or on time) will have a significant impact on whether a credit card hurts or helps your credit score in the long run.
To avoid late payments, set up auto-pay on your card for at least the minimum monthly payment. By setting up auto-pay, your credit card bill will be automatically paid with funds from a connected bank account.
Also, keep in mind that you can still set up auto-pay for the minimum payment even if you plan to pay your credit card bill in full each month. In this case, you can use auto-pay as a backstop in case you accidentally forget to pay your bill before your card’s due date.
2. Use your credit card like a debit card
Also remember that credit cards are a poor option if you need to borrow money or carry a balance. After all, the average credit card interest rate is currently teetering close to 17 percent.
If you wind up with a balance of $5,000 on a credit card with 17 percent APR and you make a minimum payment of $150 each month, you would be stuck forking over $1,814.81 in interest payments as you paid your debt off over 46 months.
Of course, it’s best to avoid paying hundreds or thousands of dollars in interest. That’s why your best bet with a credit card is to use it like a debit card, or only charge purchases you actually have the cash in the bank to pay for. Doing so can help you enjoy the perks and convenience of credit without racking up long-term debt and paying more for everything you buy along the way.
To successfully use a credit card like a debit card, you should only use your card for planned purchases and in conjunction with a monthly budget or spending plan. Most credit card issuers also make it easy to pay your balance off several times per month through your online account management page, which can help you keep your balance in check over time.
3. Carry a balance during your card’s intro period only
If you do have a large expense coming up and need to split up payments over a few months, you should sign up for a card that offers an introductory rate on purchases. Many credit cards offer 0 percent APR on items you buy, balance transfers or both for more than a year.
Popular examples include the Discover it® Cash Back and the Citi Custom Cash℠ Card, but there are plenty of other cards in this niche.
Carrying a balance during your card’s 0 percent APR period can make it possible to earn rewards and pay down debt without any interest, but you should make sure to pay off your debt before your intro period ends. If you wind up with debt that lasts beyond your card’s introductory period, your balance will start accruing interest at your card’s regular variable APR.
4. Keep your credit utilization below 30 percent
Another factor to keep in mind as you build credit is your credit utilization rate. After all, your credit utilization ratio — or the amount of money you owe in relation to your credit limits — is the second most important factor that makes up your FICO credit score.
To avoid a hit on your credit score due to your utilization rate, most experts suggest keeping your utilization below 10 percent of your available credit, or 30 percent at most.
This would mean keeping a balance below $1,000 (or $3,000 at maximum) for each $10,000 in available credit you have, or below $500 (or $1,500 at maximum) for each $5,000 in available credit you have.
According to Experian, one of the three major credit bureaus, “If you’re focused on having excellent credit scores, a credit utilization ratio in the single digits is best.”
5. Know when to upgrade
When you start looking for a first credit card, you will probably wind up with a secured credit card, a student credit card or a credit card for fair credit. These types of credit cards are easier to qualify for, and they can even be available to individuals with a low credit score or no credit history.
Either way, you should track your credit score and know when it’s time to upgrade. Generally, you may be able to qualify for a better credit card when your credit score gets into the “good credit” range or any FICO score of 670 or above. A credit score of 720 or higher can help you get approved for the best rewards credit cards on the market.
Some issuers will even upgrade your card after your credit improves. In this case, you can keep the same account number, but trade in your starter card for one with better rewards and perks. If you’re curious about this option, call your issuer and ask.
6. Define your rewards strategy
Finally, you should have a plan in place to earn credit card rewards without putting your financial health in jeopardy. For example, earn rewards by using plastic for as many purchases as you can, but only when you have the cash in the bank to pay your credit card bill in full each month.
In addition to crafting a rewards plan that helps you stay out of debt, you’ll also want to have a card that offers the type of rewards you want to earn. This could be a cash back credit card that lets you earn rewards that are good for statement credits or gift cards, but it could also mean picking a card that earns travel rewards.
Also, remember that you don’t have to settle for a beginning credit card that doesn’t offer rewards. Many credit cards for fair credit offer basic cash back on your spending, including the Capital One QuicksilverOne Cash Rewards Credit Card and the Petal® 2 “Cash Back, No Fees” Visa® Credit Card.
The bottom line
Having a first credit card won’t get you a good credit on its own. It’s how you use your card that will help or harm your credit, including whether you pay your bills on time and how much debt you wind up carrying on your card.
To get the most out of your new card, we suggest using it carefully and only for purchases you can afford to pay for in cash. Keep your credit utilization in check while you earn rewards and pay your bill on time, and you will almost certainly see your credit score increase over time.